By Shaun Harris

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ARE investors in listed property being conned by the management companies that run the property portfolio? The answer depends, as usual, on who you talk to. And there are without doubt some property management companies (mancos) that genuinely add value. So the 80/20 principle probably applies – which suggests 20% of property investors, or maybe 20% of a listed property unit trust fund, are losing a couple of basis points in return through mancos skimming unjustified fees off the rental income line.

The history, briefly, is that the property unit trust (PUT) and property loan stock (PLS) companies listed on the JSE Securities Exchange real estate sector are among the only public companies that have an “external manco” running the portfolio, that is a property manco independent of or not wholly owned by the listed company.

This is the sector trawled by a number of unit trust funds – Marriott, Coronation, Investec, Oasis, Old Mutual and Standard Bank – for the property equity funds that have become so popular among retail investors, especially retired investors due to their high and often growing income distributions.
PUTs fall under Collective Investment regulations and are also required, in terms of the fund’s trust deed, to have a manco, says Angelique de Rauville, MD of Provest Management. PLSs, on the other hand, fall under normal company law, chiefly the Companies Act, and are not required to have a separate manco. But most PLSs do, simply because they seem to have piggybacked on the same management structure found in the PUTs. FW could only identify three PLS companies – Atlas, Pangbourne, and Spearhead – that do both asset and property management in-house without an external manco.

What’s the difference? Well, for one, an external manco will charge a management fee, ranging from 0,4% to 0,75%, to the listed property company, which ultimately means it’s for the account of shareholders. The fee is calculated on the market capitalisation and long-term liabilities of the listed property company, or as a percentage of total asset values.
Nobody is going to complain about the annual management fee charged by the external mancos as long as they do a good job, but the problems are hidden costs and conflicts of interest between the manco and the listed company, which often have common directors.

As a shareholder, I have the right, difficult as it may be in practice, to object to management decisions and to vote management out of office if I can raise the necessary support. As a shareholder or unit holder in a property company with an external manco, there’s precious little I can do if I don’t like the way the manco is running the property portfolio. And unless I’m privy to inside information, there’s a good chance I won’t even be aware of the additional costs the manco is charging.

Pangbourne was the first PLS to go the in-house management route, but it learned the hard way through acquiring property companies with external mancos just how significant the hidden costs could be. CE Athol Campbell says: “We’ve found a severe conflict of interest between the manco and shareholders. I feel it’s a fundamental conflict.”

The basic problem, Campbell says, is that members of the manco are loyal to it and try to maximise profits for their company. “But the interests of the listed company that owns the property, and its shareholders, are not necessarily the same.”

Pangbourne says problems are additional and unnecessary letting fees, as well as lease renewals. “We found one manco that was moving tenants around just to generate more fees, much like the churning that happens in some unit trust funds. We invested in another company where a major estate agent held the sole selling mandate over the property portfolio, which can’t be in the best interests of shareholders.”

But shareholders don’t see these additional fees. Campbell says while every R1 that comes into the door of Pangbourne accrues to shareholders (including management), “with mancos, costs are taken off that R1 before it gets to shareholders.”