After listing on the JSE in 2011, Texton Property Fund (JSE:TEX) went from strength to strength as a real estate investment trust that has built up a portfolio of over 50 assets across South Africa and the United Kingdom. The portfolio is diversified across various sectors which include commercial office space, industrial and retail properties . At the time of listing, the fund’s total asset value was R943 million and in the five years since, Texton is about to breach the R6 billion mark. Chief executive officer Nic Morris is now leading the fund on a programme of continued diversification both geographically and by sector, whilst at the same time, aiming to reduce exposure to reduce more riskier assets Texton’s stated objective is to reduce its exposure to commercial office in South Africa and to continue to increase its exposure to the UK market by increasing its portfolio split by value to 50:50 across both countries.
The foundations of the company are in the South African commercial office space, and the portfolio of assets that Texton brought to the market at the time of listing consisted primarily of office buildings with a large number of tenants being government departments. Given the company’s change in strategy, Texton is now dramatically different and has worked hard to diversify its investments. Initially the company focused on government tenants and secondary office space in South Africa, however Morris says a new strategy has seen the company focus on diversifying its investments with a view to reducing inherent risks; reducing vacancies and negotiating longer -term lease contracts.
In 2014, when the portfolio had reached a value of R1.8 billion, the management company, Vunani Property Asset Management Proprietary Limited, was sold to new shareholders who brought with them years of experience in the property sector, both in South Africa and the UK. The new strategy firstly focused on geographic diversification through the addition of assets in the UK, which added to the established South African business and secondly, aimed to reduce the reliance on the office sector by acquiring additional retail and industrial properties.
“The strategy to diversify brought with it a new executive management team. Since the change in strategy, Texton has completed several acquisitions which have been funded through bank funding, equity in the form of a R986 million rights offer in October 2015 and proceeds from disposal of non-core assets. We deployed the funds to grow the business in both SA the UK, with a view to moving closer to our stated objective” says Morris.
“At 30 June 2016 the company owned 48 assets in South Africa and nine in the UK, including a 50% joint venture share in the Broad Street Mall located in Reading, UK. This is the company’s largest asset, valued at £65.4 million (100% of the asset). Post year end we acquired two more assets in the UK taking our entire UK portfolio value to £131 million.”
While the geographic profile of properties is heavily weighted towards South Africa, with 78% of the gross lettable area (GLA) located there, the value of the fund is spread more evenly with 58% of the value of properties located in South Africa. The 48 South African assets are valued at R3.5 billion with a GLA of 347,147m², while the 11 UK-based assets make up around R2.4billion and 93,956m² GLA.
Morris attributes this to the company strategically targeting a combination of high-quality assets in the UK and a focus on acquiring larger assets in SA whilst disposing of the smaller non-core properties.
In South Africa Texton has focused on investing directly in income-producing properties that offer attractive income growth and capital appreciation. In terms of location, the assets are currently spread across South Africa’s provinces, however, Morris explains the fund is consciously moving away from smaller outlying secondary cities and focusing on assets in the major metropolitan areas including Gauteng, Western Cape and KwaZulu-Natal.
With South Africa experiencing an ever-increasing population growth, there is an increasing lower and middle class population that are boosting retail spending. This trend has been an area of focus and Texton has and will continue to target retail assets servicing this segment of the population. By diversifying away from commercial office buildings and into industrial and retail, Texton has specifically invested in properties in strategic locations on the basis of expected footfall or future infrastructure developments.
“Retail is an important focus area for Texton. Our retail is focused on the lower to middle LSM in both SA and the UK, we look for centres with a high amount of footfall. Generally, a lower spend but a higher number of people spending,” says Morris.
One of Texton’s primary South African investments is Kempstar Mall, located in Kempton Park, Johannesburg. The retail complex is located on a commuter route, next to a train station and Morris says it is an area which sees thousands of people passing through every month. Another key retail investment which reflects the strategy is the Golddurb building in the centre of Durban’s CBD. It is a multi-storey retail centre targeting the lower LSM and importantly it contains a college within the building which Morris says creates an ‘established group of consumers’.
Texton’s investments in the UK further demonstrate its focus on high quality assets in strategic locations. The recent acquisition of Reading’s Broad Street Mall, in a 50-50 joint venture with Tradehold, is a good example.
“Reading is a town that is now being included on the Crossrail and has seen a huge number of people moving into the area where properties are more affordable. Crossrail is one of the largest single infrastructure investments undertaken in the UK and the line will provide a high-frequency commuter and suburban passenger service that will run via central London. We see this trend continuing over time and believe the increasing population will benefit our asset considerably,” explains Morris.
“The reason behind investing in properties in the UK was to strengthen the Texton investment case through geographical diversification, and by providing exposure to hard currency income streams in the form of GBP rentals, in line with Texton’s strategy.
“We had the desire to get into a market where you can buy long term income streams with high quality tenants occupying very good assets. Our investment strategy is to target investments which yield greater than 6.5% in GBP, with long triple net leases in excess of 10 years on average. Texton focuses on A grade properties and avoids the trophy assets of London which can be overpriced in our view.
“We have increased our asset base by investing in quality properties with long term leases and have improved our portfolio quality by reducing our exposure to underperforming smaller assets. Our growth has been organic as well as acquisitive.”
Morris has a clear idea of how to grow the investment fund in the future. The primary objective is to streamline Texton’s portfolio and to establish a portfolio equally invested in South Africa and the UK with exposure to office, retail and the industrial sector.
“Our current SA portfolio has core assets, which we will retain over the long term. The smaller assets are non-core and will ultimately be disposed of, leaving Texton with a core SA portfolio valued at R3.3 billion. The smaller assets are less than 10% of the value but can take up a large amount of management time, something which detracts from the team’s ability to manage the portfolio is the most efficient manner.
“The next 12-18 months will be focused on streamlining the portfolio, increasing the average size of the properties in the fund, increasing our UK exposure and reducing vacancies. The priority in South Africa is to rationalise the portfolio through non-core disposals whilst continuing to acquire good quality properties in line with our strategy.
“We are happy with our position in the UK and will continue to consider all opportunities that meet our investment criteria. We have seen huge amounts of deal flow in the UK which bodes well for the future and our growth ambitions.”