Listed property firms fix rates

WITH the interest rate environment uncertain and further rate hikes expected, listed property companies have fixed the interest rates on portions of their debt to mitigate this risk.

Depending on the view on interest rate movements, listed property companies could opt to fix for short or long periods.

Growthpoint Properties, the largest listed property company on the JSE, with assets worth more than R20bn, has decided to fix interest rates for a long time to negate the effect of interest rate movements. The company says the tactical decision has already proven beneficial to its linked unit holders.

Growthpoint fixed interest rates for a total of R1,3bn of floating rate debt the week prior to Reserve Bank governor Tito Mboweni’s announcement of a 0,5% interest rate increase.

The interest rate fix, which consists of a transaction with Rand Merchant Bank and another with Investec Bank, takes Growthpoint’s total fixed-rate debt to just more than 93% of the company’s total debt. The company says this “successfully” mitigates interest rate risk.

It says these interest rate fixes have reduced Growthpoint’s weighted average fixed interest rate from 9,6% to 9,4% and the saving should equate to about R10m.

In terms of the first transaction with Rand Merchant Bank, R650m was fixed at 8,56% for 12 years to May 31 2019.

Investec Bank was the counter party for the second transaction in terms of which R658m was fixed at 8,46 % for 13 years, starting on December 31 this year.

Growthpoint says it also managed to extend the expiry date of R501m of interest rate fixes that were due to expire in 2009. These have been extended to expire in 2021.

Growthpoint CEO Norbert Sasse says interest rates globally are in an upward cycle. “As far as we are concerned, it is prudent to hedge,” says Sasse.

“We don’t speculate with interest rates. We don’t want an aggressive view on whether they’re going up or down. We’re trying to ensure that a very high percentage of our interest-rate exposure is hedged and therefore we don’t have to concern ourselves with whether interest rates are going up or down.”

He says this gives Growthpoint the opportunity to “focus” on its properties, extract value from them and maximise net income growth.

“I don’t think many companies will have interest rate fixes for as long as we have,” says Sasse.

Ndabe Mkhize, investment analyst at Coronation Fund Managers, says that as investors in listed property assets, his group prefers limiting its “exposure to property risk” and mitigating interest rate risk on the cash flows.

“It is highly commendable that Growthpoint has increased its proportion of fixed debt . The fact that they did this before an interest-rate hike is a bonus because reacting after a hike could be injudicious.

“In general, we like to see long interest expiry schedules which indicate that the management is not trying to time the markets but is fixing regularly .”

Mariette Warner, head of property funds at Stanlib, says there are “interest-rate jitters at the moment” and it is a good strategy to fix debt over long periods. “All listed property companies do fix their debt, but not many take a very long view.”