Hardly heard of in property firms

Posted On Monday, 23 June 2003 02:00 Published by eProp Commercial Property News
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Listed property may be everybody's favourite JSE sector but, like a newly discovered celebrity without table manners, its corporate governance is generally an embarrassment

Marc WainerDisclosure is poor. There are few independent directors. Potential conflicts of interest abound. And all but four of the 25 funds in the sector hide at least some directors' earnings behind privately owned management companies (mancos).

To be fair, some companies are moving fast to comply with governance standards. But only two companies, property loan stocks Pangbourne and SA Retail, have mostly independent directors as recommended by the King report on corporate governance.

Other highly rated funds, like property unit trust Martprop, do not. Martprop's promoter , Marriott, prides itself on its corporate governance. Yet only 15% of the Martprop manco's directors are independent of its shareholders, says Barnard Jacobs Mellet's James Templeton. Marriott group directors dominate; they also do property valuations and perform the property and asset management.

Martprop's costs are higher than the industry norm and its returns over five years are low, says Templeton. This is mainly due to a large industrial portfolio, but could it also have been affected by the lack of independent control?

No , says Martprop CEO Roger Perkin. It's performing well along with industry and could soon be a top performer . Property unit trusts are controlled by the Financial Services Board, he adds, with laws that require them (unlike property loan stocks) to disclose all earnings from the fund .

If Martprop does not raise questions about conflicts of interest, the R30m valuation given to the Primegro manco does. It was sold by Primegro executives Martin Ettin and Derek Greenberg to Investec Property group, in a deal that paralleled the sale of Primegro's R2,5bn property portfolio.

That laid them open to being seen as having influenced the decision to sell the fund to Growthpoint above other contenders, because of the personal benefit to them from the manco deal.

Both property loan stock Hyprop and property unit trust Sycom say they were keen on buying Primegro.

Sycom CEO Gerald Nelson says he made a conditional offer in February (Ettin says he did not). But when Nelson wrote asking "for the same information as provided to the other potential buyers", he says, the Primegro directors replied that, as no offer was on the table, there was no information to give. Corpcapital's Marc Wainer says Hyprop had a similar experience.

Nelson says his offer would have been better for Primegro's shareholders than the Growthpoint one. And he would have been prepared to buy its manco at a similar price to the one paid by Growthpoint.

Sycom is one of the two or three blue-chip counters in the sector, and its corporate governance scores well with Templeton. Property unit trusts are derived from the unit trust industry and have similar controls, including separate management companies. Sycom has one, and 44% of its directors are independent; so are its property valuers. Its charges are above the industry average, but Templeton says that's acceptable to shareholders because Sycom has performed so well.

Like Sycom, property loan stock ApexHi (no independent directors; valuations by the directors) has high charges and high yields. But without FSB oversight, the danger of conflicts of interest is high. ApexHi is part of the Corpcapital stable and Wainer points out that Corpcapital, not ApexHi, pays him and fellow executive Wolf Cesman.

Templeton says there is not enough disclosure of what goes on between the mancos and the listed funds. They should reveal all the fees they earn, he says.

Wainer says ApexHi and Redefine, Corpcapital's hybrid fund, will disclose all fees earned by the mancos in their next annual reports.

But mancos are too profitable for the fund managers who own them to give up that easily, so potential conflicts will continue.

Ettin argues that mancos provide an important incentive for management performance and so are in the interests of shareholders. But that raises the question of why direct incentives for normally employed managers would not do the same.

Last modified on Friday, 09 May 2014 14:13

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