The launch of Burstone’s R5.4bn South African fund management business last month has provided a major shot in the arm for the group’s ambitions to grow its recurring fee-based income streams.
Essentially, Burstone has moved away from solely owning directly held bricks and mortar to becoming a third-party investment manager after the group’s rebranding from Investec Property Fund in 2023.
Burstone’s newly established SA Core Plus platform — seeded with 14 of the group’s retail and industrial properties, worth R5.4bn, and backed by a R700m investment from Nedbank CIB’s real estate funding business — has been some time in the making.
Burstone CEO Andrew Wooler spent the past three years building Burstone’s fund and asset management model in Western Europe and Australia. It has established sizeable joint ventures there with major light industrial and logistics real estate players, including Blackstone, Hines and Irongate Group.
Wooler tells the FM that bringing the same model back to Burstone’s home turf has been the next logical step. He describes the move as a “defining moment” for Burstone’s South African business, as it creates a permanent capital vehicle through which third-party investors, alongside Burstone, can build a domestic portfolio of scale.
The deal with Nedbank takes Burstone’s gross asset value to R42bn, of which almost 25% represents third-party assets under management.
The local platform’s initial portfolio includes several of Burstone’s flagship shopping centres, such as Dihlabeng Mall in Bethlehem, Fleurdal Mall in Bloemfontein and Zevenwacht Mall in Kuils River near Somerset West. Wooler notes that the transaction effectively unlocks R4.5bn in capital to pursue further growth opportunities.
‘Cautious and measured'
A sizeable portion will be used to settle Burstone’s first-loss obligations in relation to its interests in the Pan-European Logistics (PEL) platform it co-owns with Blackstone. Wooler is keen to add more retail, logistics and potentially rental housing to the platform over time. “But we will be very cautious and measured."
Wooler concedes it may take time to win over local analysts and fund managers, who typically favour property stocks with simple ownership structures above hybrid models. But he says Burstone’s contrarian strategy is the best way to unlock long-term value for shareholders, and reflects a model widely used by offshore real estate investment trusts (Reits).
“While shareholders will continue to get decent returns from our directly held properties, the fees earned from the third-party fund management business create the potential alpha,” he says.
Investors, however, will need patience, as building scale will take time. “It’s not a 12-month thing,” says Wooler.
Still, the SA Core Plus transaction is earnings accretive and will increase fee-based income from 15.5% to 19.3% of total revenue in the 12 months to March next year.
The question arises whether now is a good time to buy Burstone for those with a longer-term view, given the share price’s underperformance in recent years – Burstone is up only 33%, against the all property index’s 82% rally in the three years to October 23. At a yield of nearly 10%, the stock appears cheap relative to most of its South African peers, which are trading closer to 8%.
Catalyst Fund Managers portfolio manager Imdaad Nana says the shift to a third-party and fund management business is a differentiator for Burstone, as it is the only JSE-listed Reit actively pursuing this model as a material part of its business. While sector heavyweight Growthpoint Properties has established a similar structure, it is a relatively small portion of its total portfolio.
Nana says that if well executed and supported, third-party and fund management can be lucrative, having lower capital requirements than traditional asset ownership.
Still, he cautions investors that it comes with a different return and higher risk profile.
Nana points to the recent launch of the SA Core Plus platform, uncertainty about the deployment of capital in Burstone’s PEL platform and the potential termination of the Blackstone partnership, saying it could all have “a material impact on the risk/return profile of the company”.
He adds: “The structure is complex, with high see-through gearing and earnings risk, depending on final agreements on the transactions.” He says the market will likely get more clarity about these deals when Burstone reports interim results in early December.
Merchant West Investments portfolio manager Ian Anderson says the market is still trying to understand the rationale for Burstone’s pivot to a funds management business, which is reflected in the disproportionately large discount to NAV the stock trades at. “At this stage, there are more questions than answers,'’ he says.
