There is a lot of market debate about whether property loan stock companies should outsource management functions to companies that have their own shareholders as there is a possible conflict of interest. Most analysts and investors are in favour of in-house management saying there is transparency and good corporate governance.
Property unit trusts are required to have an outside management company in terms of their trust deeds, but not property loan stocks.
The four property loan stock companies that have in-house management are Pangbourne, Spearhead, Atlas and Resilient. Others were expected to follow the in-house management route.
In its latest monthly report on the listed property sector, Provest said property unit trusts and property loan stocks were the only sectors in the JSE Securities Exchange SA with management companies outside the listed entity.
Provest said there was consensus in the market that management companies should not exist. Any profit generated from the management of a listed company or fund should go to the listed company's shareholders.
Management companies were profit-generating entities, which have their own shareholders base and critics of this structure believed they existed for the enrichment of their own shareholders.
Provest said critics believed the structure encouraged the growth of assets in order to increase management fees and profitability of management companies.
However, it argued that as a result of this scepticism management companies have increased responsibility when recommending the acquisition of property.
Provest said management fees were calculated either on market capitalisation and long-term liabilities or total asset values. But because the market capitalisation formula was more common, management companies had a vested interest in share-price performance.
Provest said earnings performance was key to share-price performance so outside management companies were encouraged to deliver above-sector earnings.
Provest favoured the outside management company structure because the fees were usually modest enough to cover "little more than the day-to day expenses with small but sufficient incentive to increase earnings, improve share rating and grow assets".
Provest said those in favour of in-house management said the structure promoted transparency.
While this may be true, accessing detailed accounts could be "onerous", it said.
Provest said there was limited incentive for property funds with in-house management to grow assets, and that many had generous share participation plans in place where senior executives were allotted listed units.
The formulas used could result in linked units being below market value and that could dilute earnings.
Pangbourne CEO Athol Campbell said a listed property company which had its own in-house management was like any other company on the JSE, and this "encouraged "good corporate governance".
Independent analyst Liliane Barnard said that with in-house management there was no question that they are not focused on management. Shareholders also had direct recourse to address longterm under-performance.
Spearhead CE Mike Flax said Provest's report was "deficient" in that it did not give any statistics measuring the performance of companies with outside management against those with in-house management.
The report never focused on the worldwide movement away from outside management companies, he said.
