Spearhead up-beat about 2003.

Posted On Wednesday, 11 December 2002 10:01 Published by eProp Commercial Property News
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THE year past was a tough one for the South African property sector but, with the recent strengthening of the rand and the likely four percentage point drop in interest rates before the end of 2003, the bull run in Cape property, halted in November 2001 when the rand began its downward spiral, is now again gaining momentum.

Mike Flax

This was said recently by Mike Flax, the Chief Executive Officer of Spearhead Property Holdings.

'Every indicator,' said Flax, 'is now pointing to property companies being able to enjoy a good 2003 and 2004. Long bond yields have already fallen substantially and the growth in the domestic product figure is now at 3% plus. At Spearhead we have been able to capitalise on the situation by buying fixed interest rates at 13% for five years. These will cover R 50 million worth of our portfolio and, as can be imagined, the lower rates will have a significant effect on our next bottom line results, to be published in July 2003.'

The country's improved economic performance, he added, will in Cape Town result in a stronger demand for office, retail and industrial space which, in turn, will give landlords the opportunity for the first time in a long while to improve rentals significantly.

'In the coming year we expect the previously beleaguered property owner being able to charge rentals that will give a return commensurate with current building costs. 'Flax was particularly bullish about the prospects for the Cape Town CBD.

'The City Improvement District initiative has already had a very favourable impact,' he said, 'and the opening of the new Convention Centre will, I believe, transform the whole economic outlook of the city. The Centre will give rise to a wide range of spin-off activities which, in turn, will boost the entire economy of the Western Cape at a rate in excess of that of the rest of South Africa. I think the Cape Town CBD over the next two years will witness the biggest turnaround in property values ever yet recorded in any major South African city.'

Cape Town's current over supply situation, added Flax, is not nearly as serious as that of Sandton and certain other areas.

Spearhead's two most significant projects in the year ahead, said Flax, will be the Spearhead Business Park at Montague Gardens (which will be complete by the end of 2003 and by that stage will have brought 21,000 m2 of office, retail and light industrial space onto the Cape Town market) and the new National Prosecuting Authority complex, now being installed in the converted and upgraded Naspers Building which will bring 19 000m2 onto the market. This is a joint venture led by Spearhead Properties in partnership with Swish Properties and tau Pride. The building has a ten year lease with a capital value in excess of R70 million.

Asked to compare Spearhead's performance since it listed in 1999 with that of the majority of JSE property companies, Flax said, 'Although we are still relatively small with a portfolio valued at below R600 million, we are, in fact, nevertheless the best performing property listed company on the JSE Securities Exchange. Over the past three years we have achieved a compound return of 25% per annum on our share (adding capital growth to income distribution). The expected return for 2003 is a share growth of 90c and an income of 128 cents, giving a total of 218 cents or 34% on the share price of 640 cents at the start of 2000. This will maintain the 25% compound return on the Spearhead share which has been achieved since the beginning of the year 2000.'

Spearhead's strength, said Flax (as he has done previously), stems from the fact that it is self-managed, owns and is in full control of its management company. This, he said, has enabled it to avoid the conflicts of interest that have plagued certain other listed property companies in recent years. 'In particular,' said Flax, 'we will never go for growth for growth's sake. We always look first and foremost for profitability.'

In the property loan stock sector he commented that the current trend is for large companies to merge with or take over smaller companies and this has boosted the latter's share prices and, indeed, property share prices in general - but, he said, Spearhead will not go this route. It could, however, at some stage agree to a reverse takeover by its empowerment associate, Lukhanyo, the tie-up with which, Flax has already said, is likely to boost profits in the coming year.

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