Location not the be-all and end-all

Posted On Friday, 23 May 2003 02:00 Published by eProp Commercial Property News
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AN INVESTMENT in ApexHi Properties in March 2001, when the company converted from a property unit trust (PUT) to a property loan stock (PLS), would have grown more than 70% (income and capital growth). 

Gerald Leissner

Compared with the 12% decline of the Top 40 index over the same period, this return looks particularly good and underscores just how well income-producing investments are currently performing.  What makes ApexHi’s performance most impressive is that its property portfolio is still largely situated in the Johannesburg and Pretoria CBDs.

This is ironic, because CBD portfolios (especially those in Gauteng) have been rated fairly low by investors in the past few years as more companies move from downtown locations to trendy suburban addresses.  However, it seems that there has now been an about turn as most sought-after, decentralised nodes are labouring under an oversupply of floor space. This has put considerable pressure on the income growth of listed funds with exposure to decentralised suburbs (office space in particular). 

So, relatively speaking, it looks as if property funds such as ApexHi with exposure to secondary locations are far less risky than they were considered to be a few years ago.  HSBC analyst Leon Allison says that too much risk and bad news have been discounted in ApexHi. He believes that high-yielding stocks such as ApexHi are currently a better bet than blue chip shares, such as Grayprop and Sycom.

“We prefer the security of high income yields to the expectation of future capital growth.”  ApexHi CE Gerald Leissner says that though CBD buildings are traditionally regarded as riskier than A-grade buildings in decentralised suburbs, the argument is no longer valid. He says that the latter are in fact riskier, as the potential of rental losses (where contracts are renewed at lower levels) is higher in the more expensive suburbs than in CBDs.

Rentals in the latter have already fallen considerably over the past few years, so CBD landlords are taking smaller knocks than those in decentralised nodes.  Since CBD rentals are more competitive than those in the suburbs, it’s also easier to keep tenants, Leissner says.  So it looks as if ApexHi is benefiting from its strategy of focusing on the quality of tenants and leases rather than on location.

More than 70% of the space in the portfolio is let to A-grade tenants – in other words, Government departments with no credit risks, public corporations and large listed companies.  But Leissner admits it’s still one of ApexHi’s major challenges to fill space when leases expire. The portfolio’s vacancy rate currently stands at 14% (the sector average is 8%). B

ut Leissner says a vacancy rate of 14% for a secondary portfolio is considered low. It must also be noted that most of the vacant space is not paid for.  However, the fact remains that there are few new tenants for buildings in downtown areas. This means the fund must rely heavily on retaining existing tenants.    
    
It seems to be succeeding in this regard. Of the 173 000sq m (or 17% of the total portfolio expiring this year), 112 000sq m (or 65%) have been renewed by existing tenants. New contracts were signed for a further 55 000sq m. In addition, the lease expiry profile over the next five years is well spread at less than 20%/year.  T

he other challenge is to reduce debt. Though ApexHi’s gearing is relatively low at 31%, Leissner aims to reduce it to 25% within two years. However, interest rate risk is limited, since nearly 90% of its borrowed money is fixed at an average rate of 13%.  ApexHi has increased the value of its portfolio more than sevenfold since March 2001, from about R270m to the current R2bn. 

Another interesting facet of ApexHi is its split unit structure with separately listed A and B units. A units currently offer a yield of 13,8% and B units 16,7%.  A unit distribution is fixed, while B units are less certain – which is why investors who buy A units usually want a stable, guaranteed income.

B units are for those with a greater appetite for risk and therefore these units offer greater growth potential.  This has indeed happened this year, as B unit holders have seen their distribution grow while the distribution of A units has remained constant – a trend expected to continue for the next six months.   

Last modified on Tuesday, 29 April 2014 17:48

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