By Ian Fife 
  
The race is on to find investment opportunities in commercial property, now that clear signs have emerged that the commercial sector is following the residential market into broad recovery.  The problem is that individual properties are too expensive for most investors.

Their only practical choice is between property-related insurance and pension products or the listed sector.  But the almost total lack of information on the performance and cost of insurance and pension properties makes analysis impossible (see Property July 30). And the listed sector, though transparent, has so many variables that it's difficult to know how they help to make property investment decisions. 

It is an intricate task, says property consultant Niki Vontas, but investors can strip information out of the funds' annual reports that concentrates purely on their core reason for existence - the properties. 

"Then they can feel the pulse of these funds and make comparisons," says Vontas.  The core information is divided into performance - growth in the portfolio, JSE yield and growth in net property yield - and cost ratios (see table). And the make-up of the portfolio has an enormous effect on a fund's costs. 

Grayprop, Pangbourne and ApexHi's property expense ratios are above the 30%-35% norm. ApexHi's is highest at 54% of gross rentals in 2003.

Grayprop CEO John Rainier points out that his portfolio is 65% retail, with a large proportion of regional shopping centres that have expensive centre managers and tenants' associations.  ApexHi has been designed to give high yields from properties in non prime areas with high vacancies that need intensive management. "So those costs are a fact of life," says ApexHi CEO Gerald Leissner. 

Pangbourne has a large industrial portfolio of small properties averaging about R4m each in value.  Vontas says it can take years for fund managers to bring down their expense ratios. For instance, ApexHi would have to find tenants for a substantial part of its 250 000 m² of empty space. ApexHi director Marc Wainer says the company has targeted 70 000 m² of the most lettable space and aims to fill half of that in a year. That would reduce costs to below 50%, which is still well ahead of the rest. 

Management costs are made up of asset management fees (usually 0,5% of a fund's JSE market capitalisation ), property management (between 2,5% and 5% of gross rent) and the salaries of the fund's executive management. 

Dedicated staff at Broll property managers must intensively manage ApexHi's portfolio. And some low management ratios such as Paramount's may reflect poor performance by the fund - so low performance-based salaries. Paramount is recovering, so the management ratio may rise this year. 

But managements at Grayprop, Redefine and Pangbourne, one of the three self-managed funds in the sector, should be asked why their management ratios are out of line with those of their peers.

This could be because some of these fees are paid against the listed company performance which has outperformed its properties.  The growth in property yields is a key indicator of performance.

The biggest improvement - from 7,3% of property assets in 2002 to 12% in 2003 - came from Pangbourne, helped enormously by acquiring high-yielding properties from Sage.  The biggest yield fall was in Hyprop, possibly connected to buying Cape Town's giant Canal Walk shopping centre.

"But clearly the market is happy with Hyprop because its listed yield, at 9,2%, is among the lowest in the sector," says Vontas.  Yields at Grayprop fell from 13,3% to 11,5% but its listed yield is 10,2%. 

The core information should be balanced against the cost of borrowing. The average weighted cost of capital - listed yield, historic dividend (the cost of "borrowing" from the shareholder) and the interest rate - should be weighed against the net property yield. 

But it is easy to see that the best overall performer is Sycom, with portfolio growth, a big increase in property yield, low expense ratios and among the lowest management ratios.