The Investment Case – Redefine Properties Ltd. - 101: For beginners

The Investment Case – Redefine Properties Ltd.

A liquid property option.

Listed property has become an increasingly popular investment in recent times. It has been one of the top performing asset classes of the past decade, offering good income returns as the sector's defensive qualities have stood up through the economic upheaval since 2008.

Offering lower risk than equities and generally higher returns than bonds, listed property has become particularly attractive to more conservative investors looking for a growing income stream. As property funds pay out almost all of their income, they also serve as protection against inflation, since rental incomes generally increase in line with or slightly above inflation.

While some analysts believe this performance from listed property funds is unlikely to continue, this sector continues to attract investor interest. As the second biggest local property fund on the JSE, Redefine has been one of the beneficiaries.

Redefine's portfolio comprises nearly 400 properties across the office, retail and industrial sectors. In addition, it owns 29.4% of listed retail property fund Hyprop and a controlling stake in London-listed business Redefine International plc (which it holds through JSE-listed Redefine International Ltd.).


The Redefine Income Fund was launched in 1999 and listed on the JSE the following year. Its initial portfolio consisted of 50% direct property interests, and 50% listed securities.

The company made its first offshore play in 2006 by acquiring an 18% interest in London-listed Ciref plc. This move made it the first JSE-listed property fund to take on overseas assets.

In 1999, Redefine acquired all the units of listed property fund ApexHi (which had absorbed Ambit earlier the same year) and its management company Madison Property Fund Managers. This led to a merger between the three entities.

During 2010, Redefine increased its interest in Ciref plc to a majority holding and effected the name change to Redefine Properties International. As it was unable to gain approval from the South African Reserve Bank for an inward listing for this subsidiary, Redefine elected to transfer this entire shareholding into a new local listing called Redefine International Ltd.

Earlier this year, Redefine International plc completed a reverse takeover of property investment company Wichford, which gave it a listing on the main board of the London Stock Exchange.


For the financial year ended 31 August 2011 Redefine paid out 68 cents per linked unit. This followed distributions of 66.5 cents per linked unit in 2010, 56.55 cents per linked unit in 2009 and 56.63 cents per linked unit in 2008.

The counter offers a yield of 8.5%.

Which funds hold this stock?

Redefine is the second largest holding in all three of South Africa's top performing listed property unit trusts over the past three to five years. It makes up 18.5% of the Prudential Enhanced SA Property Tracker Fund, 17.0% of the Stanlib Property Income Fund and 15.7% of the Investec Property Equity Fund.

Only one of the five leading general equity funds holds Redefine stock. The Prudential Equity Fund gives the counter a weighting of 0.3%.

To see which funds are buying and selling the counter, visit Moneyweb's Unit Trust Portfolio Tool.

Why would an individual consider investing in this company?

Due to its size, Redefine offers investors a degree of liquidity in a sector that is often illiquid. It therefore offers a good entry point into the property sector.

Redefine is also able to spread its fixed costs across a wider portfolio of properties than most of its peers, which should increase its yields. This has been further enhanced by the company bringing its property management functions in-house rather than outsourcing them.

“Redefine's size allows scale in negotiating borrowing rates from lenders,” notes Efficent Select analyst Stuart Sinclair. “With a forward yield of close to 9%, the counter is trading at a significant discount to the sector despite its size and liquidity.”

Through Redefine International, the stock also offers investors exposure to properties in the UK, Germany, Australia and Switzerland. While its foreign operations only accounted for marginally over 5% of Redefine's net property income in the last financial year, this has the potential to grow significantly. Redefine International owns 184 properties with a value exceeding £1bn, and the group has indicated that it has intentions to focus more on international expansion.

What risks does this company face?

Redefine's direct property portfolio has the highest exposure to the office sector of any of its peers. As a result, the fund is most susceptible to downturns in this market.

“The office sector is facing oversupply in many nodes and continues to lag the retail and industrial sectors,” says Sinclair. “The high exposure to the office sector in particular has led to an overall vacancy rate of close to 9%.”

Like all property companies, Redefine is also facing pressure from tenants to keep rental increases to a minimum. This is primarily due to the impact of the higher costs of water and electricity.

Furthermore, Sinclair believes that Redefine's large portfolio can present challenges to management. With close to 400 properties to look after, the fund could struggle to keep a handle on all of its assets. The group is however taking steps to reduce this number.

Investor trust in Redefine was also dented by the company's failure to meet its own forecast for distributions in the 2009 financial year. The fund will be acutely aware that it cannot afford to damage this confidence any further by missing future targets.

Where does this company’s growth potential lie?

In the short-term, Redefine's growth prospects remain modest, as economic conditions remain mostly unchanged.

“In the past, the group has been reliant on development and non-recurring revenue streams to boost growth,” Sinclair notes. “But given the current environment, many of these streams have dried up.”

The group is however in a process of disposing of a number of its lower grade properties, valued at about 10% of its portfolio. It hopes to replace these with fewer properties of higher quality.

In this regard, it is in talks to acquire between seven and fourteen properties owned by Zenprop Property Holdings. It has also announced that it will be unbundling Arrowhead Properties and its 98 properties into a separate listing. This will simplify the Redefine portfolio and make it easier to manage.

In Namibia, Redefine is looking to achieve control of Oryx Properties through increasing its stake in that business. Oryx has a portfolio of 26 properties, including Windhoek's premier retail site, Mearua Mall.

It is also possible that Redefine may at some point make a bid to acquire all of Hyprop, which is primarily focused on retail properties. A number of analysts believe that this would make it a more balanced portfolio and make it comparable to the JSE's largest listed property fund, Growthpoint.

For more, visit Moneyweb's click-a-company profile on Redefine Properties Ltd.


Denny Crane

Denny Crane
It's not me ... yet. Denny Crane from the TV series Boston Legal. Click on picture if you're not sure who he is!