Property companies dumps mortgages for cheaper bonds

Vukile Property Fund Ltd. is leading South African real estate companies in a record switch out of asset-backed securities as they take advantage of the lowest interest rates in 30 years to refinance more expensive debt.

Debt sales by companies including Johannesburg-based Vukile and Growthpoint Properties Ltd., Africa’s largest real-estate investor, rose to more than 3 billion rand ($370 million) this year, according to data compiled by Bloomberg. That’s 3 percent more than all of 2011 and higher than any other year.

Demand for South African debt is increasing as investors seek higher returns than on the safest government securities from the U.S., Germany and Japan. The gap between yields on South African bonds due 2021 and similar-maturity Treasuries narrowed to 513 basis points this month after starting the year at 607, or 6.07 percentage points. Asset-backed bonds yield about 1 percentage point more than five years ago.

“Mortgage-backed securities have always been quite cumbersome and quite rigid,” Growthpoint Chief Executive Officer Norbert Sasse said by phone from Johannesburg yesterday. “We’re getting cheaper funding from the bond market for senior unsecured debt than we are getting from the banks.”

Record Sales

Even as property companies move to other funding sources, issuance in South Africa’s 50-billion rand asset-backed securities market is heading for the highest since the global financial crisis began five years ago as banks diversify to meet new capital rules, known as Basel III. Sales of asset-backed debt may rise to 30 billion rand this year, the most since peaking at 42 billion rand in 2007, according to Johannesburg- based Standard Bank Group Ltd., Africa’s largest lender.
Raising debt capital is “less cumbersome and costly” than selling asset-backed securities, which restricts the sale of properties included as collateral, Laurence Rapp, chief executive officer of Vukile, said from Cape Town Aug. 8.

“The rules around securitization structures tend to start impinging on the flexibility of how you can run your business,” Rapp said.

Vukile raised 1.02 billion rand issuing bonds in May, including 580 million rand of notes due August 2015 priced at 130 basis points above the Johannesburg’s Interbank Agreed Rate, or Jibar. The average cost of the debt amounted to 8.8 percent, 1 percentage point less than for asset-backed securities, the company said on May 29.

No Value

Growthpoint, which has more than doubled in market value on the Johannesburg stock exchange since 2000, issued bonds due January 2015 for 750 million rand in January at Jibar plus 135 basis points. Jibar last month fell to 5.075 percent, the lowest since at least 1999, and measured 5.081 percent at 4:50 p.m. in Johannesburg yesterday.

The property companies’ debt is expensive, Bronwyn Blood, who helps manage the equivalent of $3 billion in fixed-income assets at Cadiz Asset Management Ltd. in Cape Town, said in a telephone interview.

“We do not see value in this paper at the moment,” she said. “Spreads are way too narrow on the property companies -- particularly on an unsecured basis.”

Falling Risk

Yields on South Africa’s dollar-denominated corporate bonds were 50 basis points less than emerging-market peers yesterday versus a premium at the start of the year, according to JPMorgan. The rand weakened 0.7 percent to 8.1516 per dollar as of 4:55 p.m. in Johannesburg yesterday.

The cost of protecting South African dollar-denominated sovereign debt against non-payment for five years using credit default swaps has declined five basis points this month to 129 yesterday, indicating an improvement in risk perception, according to data compiled by Bloomberg. That compares with 242 for the average of emerging-market countries in eastern Europe, Middle East and Africa.

Banks are ramping up the amount they charge on loans before Basel III capital rules and liquidity requirements to be introduced by 2018. Standard Bank’s average rate on new loans in 2011 was 11 basis points above the Prime rate used by local lenders to set interest charges. That compares with 20 basis points below a year earlier, the Johannesburg-based company said March 8.

Basel III

“With the Basel III requirements coming in, that does make bank funding more expensive,” Vukile’s Rapp said. “Being able to access the debt capital markets is certainly a very important part of our strategy because it gives access to cheaper funding.”

Property companies must diversify their funding sources to remain prudent, Estienne de Klerk, a director at Growthpoint, said by phone Aug. 7 from Durban, on South Africa’s east coast.
Real-estate investors “could be raising more in the bond market,” Mariette Warner, a fund manager at Absa Investments, a unit of Absa Group Ltd., said by phone from Johannesburg on Aug. 7. “We’re confident there will be more in the near future.”

(Bloomberg News)

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