By Ian Fife 

Hyprop benefits from institutions' unerring instinct to buy and sell at the wrong time     
 
Excellent investment timing has given Hyprop and the Ellerine family a R600m windfall in little over a year.  Independent valuers say Cape Town retail mall Canal Walk was worth R1,8bn in December 2004, up from the R1,165bn the partners paid in October 2003. 

About R500m of that could have been Nedbank's if it had hung on to the property in a rising retail market. But even international institutions and mortgage lenders seem unerringly to sell as a property market turns up and buy as it levels out.  There was banking logic to Nedbank selling. It inherited Canal Walk in the takeover of BoE Bank, and at a time when its own capital adequacy was just above regulatory requirements. 

"It is clear that with the benefit of hindsight we sold Canal Walk at the wrong time in the cycle," concedes Nedbank financial director Mike Brown. "But it would also not have been sensible for us to continue with more than R1bn of capital tied up in the shopping centre when we needed to allocate that money to earning returns in our core business." 

Nedbank management would have incensed shareholders at the time if it had clung to Canal Walk.  Brown says Nedbank made sure it got competitive bids "to ensure we maximised proceeds at that point in the cycle when we chose to sell. If all the experts had foreseen the upswing, surely they would have been prepared to bid higher prices for the asset?" 

There is little doubt that most property experts would have advised management to hang on to Canal Walk in June 2003 when they negotiated the sale to Hyprop. And some of the best property experience in SA was at hand. There was the property division of major shareholder Old Mutual and Nedbank's expert team, led by Brown and current property finance chief Frank Berkeley.  But there is no sign that the bank sought the advice of such experts.  Nedbank didn't get it all wrong, though, says Brown.

"In 2004 we sold a number of the properties we had taken into possession at combined profits of up to R100m."  True, but those properties were managed by Berkeley and his property finance team, who knew what to do with them. Canal Walk was controlled elsewhere in the bank. 

Nedbank would not have gained the full R600m if it had held on. Hyprop is backed by the proven retail expertise of Wolf Cesman and Marc Wainer of its joint managers, Madison, as well as that of 20% Canal Walk partners Eric and Syd Ellerine. Cesman says it is difficult to tell how much of the gain in value was from improved occupancy and rents. But at least R100m would have come from that. 

"The property market is burdened with poor information flow, making it difficult for large institutions to read," says property economist Francois Viruly. "That's why property offers wonderful arbitrage opportunities like the one that Hyprop and the Ellerines took." 

But all Nedbank had to do was monitor growth in consumption expenditure to see that retail property was in an upswing.  "Institutional fund managers also have the same problem," adds Viruly. "They wait until office or industrial vacancies drop to 4% and then start buying. 

"But they should have been buying the moment vacancies started dropping, which can be a year before the noticeable upswing. While investing and developing at single digit vacancy rates may sound safe from a boardroom perspective it is often too late." 

He says it can take up to two years for developments to reach the market and by that time the property cycle is heading to a market oversupply. "It's a timing and management issue."