Johannesburg - A plunge in the share prices of South African real estate investment trusts tied to Resilient REIT is starting to impact the ability of investors in the property companies to borrow using the stock as collateral.



Investec’s [JSE:INL] wealth unit informed customers that it would no longer accept the securities of Resilient, Fortress Reit, Greenbay Properties and NEPI Rockcastle to back loans from the beginning of this month, according to a note sent to clients.

Standard Bank [JSE:SBK] is also looking into not accepting the shares as collateral, although it hasn’t made a final decision, according to a person familiar with the matter, who asked not to be identified as the information isn’t public.

Lenders are getting tougher with the intertwined REITs after a slide in their shares made them 2018’s worst-performing property stocks globally. Fortress has dropped 62% this year, while Resilient has tumbled 53% after the funds came under scrutiny from hedge-fund manager 36ONE Asset Management and analysts at Arqaam Capital, who questioned the valuation of the companies and inter-related transactions.

Resilient reversed earlier gains to close 0.6% down in Johannesburg on Tuesday, while Fortress declined 0.3% after climbing as much as 15%.

Artificially inflated

“It must be difficult for banks to work out what the real value and risks are when it comes to these stocks,” said Petri Redelinghuys, founder of Herenya Capital Advisors. When the companies trade each other’s shares it “artificially inflates the prices and the asset values to some extent, and that is why certain banks are refusing to accept the shares as collateral.”

Standard Bank has the highest exposure to Resilient and Fortress with R11.2bn lent directly to the companies, Avior Capital Markets analysts including Harry Botha said in a note.

FirstRand's [JSE: FSR] Rand Merchant Bank is owed R8.1bn, Nedbank [JSE:NED] about R4.4bn and Barclays Africa’s [JSE:BGA]. Absa R1.6bn, the analysts said. Most of the loans are backed by property, with only Nedbank having 82% of its collateral tied up in securities, according to the report.

'No reason'

Standard Bank has sold about R500m of its estimated R3.3bn exposure to the Siyakha Education Trust, the person said. Resilient and Fortress, which provided loans to the trust to buy shares in the companies, said on February 22 that it started negotiations with the trustees of Siyakha and its lenders regarding debt and underlying collateral.

“There is no reason for the banks to do that, other than the association relating to the negative reports about our shareholders,” said NEPI Rockcastle joint-CEO Spiro Noussis. The impact on the businesses because of banks not accepting shares as collateral, “is difficult to say as it depends on their individual positions.”

While Resilient and Fortress are two of the largest shareholders in NEPI Rockcastle, it doesn’t own shares in Resilient or Fortress, said Noussis. “As founding shareholders, Resilient and Fortress have retained a material shareholding in NEPI Rockcastle and Resilient’s chief executive officer is part of our board,” said joint-CEO Alex Morar. “However, NEPI Rockcastle still has the majority free float.”

NEPI Rockcastle had talks with money managers in Cape Town and Johannesburg to provide some comfort that its operations were performing in line with expectations, said Morar.

'Adequately secured'

Investec and Barclays Africa didn’t immediately respond to requests for comment. Rand Merchant Bank’s exposure to Resilient and Fortress is “adequately secured,” the lender said in an email, declining to give details. Nedbank declined to comment. Standard Bank will assess each transaction on a case by case basis, it said.

“I am only aware of one bank not accepting our shares as collateral,” said Resilient CEO Des de Beer. “This does not affect our business.”

Resilient owns 15% of Fortress, which in turn owns about 6% in Resilient. Fortress holds 24% in NEPI Rockcastle and 25% in Greenbay Properties, while Resilient has a stake of more than 17% in Greenbay, according to data compiled by Bloomberg.

Resilient on February 16 said it will commission an independent review to consider feedback from shareholders about unwinding the crossholdings with Fortress and its relationship with Siyakha.

