Johannesburg - The market has not fully grasped the fact that
Fountainhead Property Trust [JSE:FPT] distributions will be substantially diluted by the group's refurbishment of the Blue Route Mall, an analyst said on Friday.
The industry finds itself in a period when top quality malls are not for sale, with retail-focused property companies preferring to refurbish existing assets.
Fountainhead's planned redevelopment therefore doesn't look like anything out of the ordinary. However, the retail-focused group is spending R850m to redevelop a R600m asset, adding only about R250m in value.
"We don't believe the market fully appreciates how material the effect will be on the distributions," said Evan Jankelowitz, co-head of Stanlib's property franchise.
"This is not a finger-pointing exercise. We like the management and the assets - we just don't want to be around when the earnings take a knock."
Since peaking in March this year at 714c, the share has dropped to 652c on July 22.
The R7.8bn property group's portfolio consists of centres like Westgate Shopping Centre in Roodepoort, Kenilworth Centre in Cape Town and Brightwater Commons in Randburg.
According to Jankelowitz, the centre's redevelopment is a necessary evil taking place at the right time - building cost deflation and a lack of speculative building is keeping development costs low.
Fountainhead's retail-focused peer,
Hyprop Investments [JSE:HYP], spent R479m extending the Canal Walk Shopping Centre and The Glen during the 2009 financial year. The group is also extending The Mall at Rosebank.
Resilient Property Income Fund [JSE:RES] is one of few retail-focused groups to have embarked on an aggressive shopping centre development strategy this year. However, the group avoids the urban, well-established nodes, aiming to cater for the rural, lower-income shopper.
"This is the cheapest and most efficient way to do this," said Alan Menigo, Fountainhead's financial manager. "The top quality shopping centres never come on sale."
According to Menigo, the centre will continue to trade at about 70% capacity, translating to about R22m loss in retail sales over the next two years.
"This property has been doing well for some time; according to the property fundamentals it's solid - there aren't other shopping centres nearby and it has a close community," said Naeem Tilly of Avior Research.
"But by effectively only adding R200m value and taking on all the debt, from a distribution point of view they won't show strong growth," Tilly said.
Fountainhead's forward yield - the percentage of unit price investors are likely to receive based on historic results - is 8.7%, compared to Hyprop's 7.04% and Resilient's 7.5%.
- Fin24.com