Finding value in commercial property market 'tougher'

Posted On Thursday, 02 June 2005 02:00 Published by
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The easy money in the listed property sector has already been made by property companies and they are going to find it far more difficult to find value in the commercial property market now
By Nick Wilson

The easy money in the listed property sector has already been made by property companies and they are going to find it far more difficult to find value in the commercial property market now, analysts say.

Company leadership as well as companies' property developments will be key contributing factors to future success.

Colin Young, fund manager of Old Mutual's South African-listed property funds, says over the past two years it was relatively easy for companies to assemble property portfolios and extract value.

Young says in future it is going to be much tougher for property funds because sellers are asking more for property and negotiations are getting tougher.

"However, this does not mean it is impossible."

Young says now the company's focus on developments and its competence in developments will become key to success.

He says listed property unit trust Sycom, for instance, has to be given more value for its "excellent" property development pipeline.

Young says that in the UK and the US more value is credited to the development pipeline of a company than in SA.

"It is now time to align ourselves more with these practices. In SA the development pipeline, which is developments that are planned but not yet built, are seldom valued beyond three years and this does not represent their true potential," he says.

Sycom is at present involved in the development of two malls, as well as office blocks.

Young says the market is going to have to start assessing the long-term potential of developments because that is where the value lies.

"Companies have to make it happen for themselves. It is going to be far more difficult to find value in the property market now. It is going to require a combination of buying older buildings and refurbishing them and redevelopments," he says.

Young says another key feature in the success of property companies on the JSE Securities Exchange SA is going to be innovation and leadership.

"Assembling a portfolio of about R1bn worth of properties is not going to be easy. It's going to be a lot harder out there."

Catalyst Securities MD Andre Stadler, MD of Catalyst Securities, says that, in particular, the ability of management to extract value from existing assets will be a key factor in differentiating the performance of companies, as the ability to acquire attractively priced assets becomes more difficult.

"With building costs accelerating at the pace they are, the replacement costs of existing assets are rising in accordance with that," he says.

Stadler says that a fund like Sycom has been ahead of "the curve" as far as its development pipeline is concerned.

"It (Sycom) started planning its new office developments three years ago in a weaker market. They are going to reap the rewards as demand continues to grow for additional office space."

Stadler says quality assets are going to become increasingly scarce and the only opportunity will lie in looking for "internal opportunities for development" and redevelopment of existing property portfolios.

He says other listed property funds that are extracting value from new developments, redevelopments and refurbishments include Acucap, which has just completed the Festival Mall in Kempton Park, Resilient, which is continually revamping and redeveloping its existing assets, Spearhead, Octodec and Premium, which has converted offices to residential space.

Business Day
Publisher: Business Day
Source: Inet Bridge

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