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Buying landlords and tenants in Cape Town.

Posted On Thursday, 03 October 2002 03:01 Published by
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Louis Group structures a unique deal to boost Seeff subsidiary.
By Ian Fife

It could be a bonanza year for some landlords and tenants. This is because Cape Town's Louis Group is launching a new lease-financing structure, designed to expand its property-broking arm, Seeff Commercial.

Originally a successful Bloemfontein property family, the Louises moved to Cape Town in 1994. There, they built a big property, financial services and IT business.

Recently, the company has been investing heavily in the UK, where CEO Alan Louis now runs his office. 'We've been transplanting ideas between countries and one of them is lease-financing,' he says.

The company's subsidiary, Louis Group Securities, has been financing office equipment and fitting out offices at low interest rates for tenants in its SA and UK properties.

'For instance, we tailor-made offices and equipped them for a new call-centre tenant at our 47-on-Strand offices in Cape Town,' says Louis. 'And then we built the cost into its long-term lease.'

Now he is adding this to a lease-discounting service, but only for clients of Seeff Commercial in Cape Town. Financiers discount leases by buying the income stream of the lease from the landlord at a discount.

A five-year lease of, say, R100 000/month, with a 10%/year escalation clause, will give a total income stream of about R7,3m for the lease period. Instead of collecting monthly rents over the full five years, the landlord would collect a single payment at the beginning of the lease.

This would amount to the total income stream at the beginning of the lease, less a discount calculated as a loan and as a percentage of the income each year. In this case, the landlord would get between R4m and R5m. The financier would then collect the rent.

Combining the two forms of finance into one lease - and giving both landlords and tenants a cash advantage - is unusual.

Louis says he can undercut the interest rates banks charge for financing tenants by 4% or 5%. He will not disclose his lease-discount rate, claiming he would lose his competitive advantage if he did.

Banks usually limit their lease-discount market to top tenants, those listed on the JSE Securities Exchange or multinationals. But Louis says he will also finance B-grade tenants.

There is no limit to the length of a lease. It can be for a six-month period if the landlord has a need, says Louis, and there are other flexibilities. 'We are entrepreneurs, after all,' he adds.

Competition in the Cape Town commercial-broking market is particularly fierce, with a large number of small brokers and only a few largish ones, notably Broll, JHI, Diamond and Baker Street.

Errol Diamond believes the Louis Group's move is strategically smart. 'The growing listed-property industry is looking for brokers and managers who can cover all property sectors. Seeff is not the biggest broker in Cape Town and, if he can build up market share now while the industry is weak, he will be in a strong position in a few years.'

But Diamond warns that Seeff may find it difficult to get talented staff - there is an industry shortage - who can match those of the big four brokers.

Financial Mail

Publisher: Financial Mail
Source: Financial Mail
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