Heartwood Properties has become the first Cape Town Stock Exchange (previously called the 4 Africa Exchange) listed real estate company to invest outside SA, with a deal to build offices in Glasgow, Scotland.

Heartwood, which listed with assets worth about R120m in March 2018, had grown its portfolio to R200m in the past two years. The company’s property portfolio is made up of offices and warehouses.

“We joined 4AX so we could get access to capital. We have raised capital twice and our balance sheet is now in a healthy position. The aim is to develop assets and then exit those assets, giving us development profits which we can then pay to our investors as dividends,” CEO John Whall said.

The 4AX was created to attract medium-sized companies seeking to raise capital from public investors but without having to pay the fees attached to listing and keeping a listing on SA’s 133-year-old JSE.

4AX was founded in 2014 and started trading with its first listing in 2017. There are now seven listings on the bourse and its market capitalisation is about R7bn. It offers share trading without any minimum fees.

All of Heartwood’s investors are private individuals. The company’s developments tend to be valued between R30m and R50m each. Listing on the 4AX lets Heartwood save the costs it would have to pay if it traded on the JSE instead.

Development skills
Whall said Heartwood had built up its development skills since its formation in 2011 and these could be used in the UK where there was healthy office demand.

This was despite weak economic fundamentals in the UK amid the Covid-19 pandemic.

The company will co-invest in the Blythswood Quarter commercial office development in Glasgow with local developers Artisan Real Estate.

Heartwood has taken an equity in the joint partnership worth £200,000 and expects a 20% internal rate of return (IRR) on the project.

The IRR is a metric used in capital budgeting to estimate the profitability of investments. It is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

Whall said Heartwood would sell its stake in the Glasgow development in about three years.

Locally, he said Heartwood had plans to sell some of its older properties.

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This was part of a new policy of selling some assets after a four-year initial period to return cash to shareholders in the form of a special dividend, while still maintaining a base portfolio of assets.

The company was in talks with buyers despite the pandemic. It was 50% geared and had one year’s worth of rental in cash, which meant it was in a healthy position.

The group’s development team also recently completed its Soleil office development in Bryanston under budget.

“Although the risks associated with the Covid-19 pandemic are difficult to predict at this stage, I feel that we are in a very strong position to successfully manage through this crisis and remain on our strategic growth path,” Whall said.

As Heartwood is not a real estate investment trust (Reit), it is not obligated to pay regular dividends. Heartwood did not intend to convert to a Reit in the near future, instead choosing to focus on generating development profits.

Article by: Alistair Anderson (https://www.businesslive.co.za/bd/companies/property/2020-06-17-heartwood-invests-in-glasgow-as-it-sees-development-profits-in-the-uk/)