Listed sector gets ducks in a row

Posted On Thursday, 30 March 2006 02:00 Published by eProp Commercial Property News
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Listed Property Fund, until recently rather slow on the transformation front, are expected to step up black empowerment deal-making over the next few months to comply with the requirements of the Property Sector Transformation Charter signed last week by Government and industry players.

Norbert SasseThe charter sets a 25% black ownership target and 40% black control on boards and at executive management level within five years. Property companies will also be required to set aside 10%/year of their investment budgets for developments in previously neglected areas.

Listed property loan stocks (PLSs) and property unit trusts (PUTs) will be particularly pressed to comply with the charter's ownership targets, as the sector is a dominant player in South Africa's commercial property market, with a combined market capitalisation of around R60bn.

A number of empowerment deals were announced recently as pressures start to mount for commercial property players to deliver on their empowerment commitments. The latest include a deal between a black consortium - including Transport Minister Jeff Radebe's wife, Bridgette, and Sanlam offshoot Vukile - in terms of which it will acquire a 25% stake in Vukile for R439m. Another deal worth R169m will see empowerment group Thesele becoming a 10% linked unit holder of Acucap.

Loan stock Calulo, assembled as an empowerment fund from the outset by RMB, further upped its charter credentials earlier this month by selling a 28% stake for R48m in holding company Calulo Investments to Matemeku, the black-owned company founded by businessman Moss Mashishi.

Other listed funds that have already gone the empowerment route include Capital, Spearhead, Resilient, Pangbourne and Growthpoint. The last mentioned concluded the largest empowerment deal in the listed sector to date in value terms, with a consortium including former Justice Minister Penuell Maduna and former Scorpions boss Bulelani Ngcuka acquiring a 14,2% stake in Growthpoint for R1bn in August last year.

But so far it's only Spearhead, Vukile and Calulo that come close to or exceed the charter's 25% empowerment equity target. Black ownership of the other mentioned funds still lags at between 10% and 15%.

Norbert Sasse, chairman of the Property Loan Stock Association, which represents the bulk of funds in SA's listed property sector, says that with the charter now signed, more of its members are expected to embark on meaningful transformation initiatives.

However, reaching transformation targets may be easier said than done, as funding empowerment deals remains a major challenge, particularly with listed property yields dropping to 7% or less in some cases.

Sasse says that though there's enough money available to finance empowerment property deals, it's become expensive to do so. With the listed property sector's forward yield at about 7% and lending rates currently much higher at around 9% to 9,5%, return on investment is lower than financing costs. So someone has to take the knock, says Sasse.

He argues that the industry will either have to become more innovative in finding cheaper ways to fund empowerment deals or shareholders will have to accept some short-term pain for long-term gain.

Metropolitan Asset Managers portfolio manager Chris Naidoo says that financing empowerment deals could prove increasingly difficult with listed property prices already up more than 40% over the past 12 months.

Naidoo says there's likely to be some dilution in earnings of specific companies initially when the deals take place. But over the long term the overall effect of empowerment transactions on the listed sector will no doubt be positive.

However, Musa Ngcobo, chairman of the SA Property Owners' Association's property charter committee, says that the answer to funding empowerment deals doesn't lie with cheap but rather with structured finance.

Ngcobo says that the fact that a number of listed funds have already managed to strike large empowerment deals proves that there are ways and means of finding structured funding solutions.

But be that as it may, PUTs in particular may find it difficult to comply with empowerment targets as legislation governing PUTs (Collective Investment Schemes Control Act) imposes legal constraints on PUTs wanting to change their ownership structure.

And PUTs aren't allowed to buy back a pro rata portion of existing shareholders' shares and issue these to new shareholders, as has been done with some empowerment deals in other sectors. So such deals would have to be funded by issuing large chunks of new shares, forcing funds to bulk up portfolios.

However, bigger funds - particularly those focusing on niche sectors - could struggle to find sufficient property stock (at the right prices) to increase asset values by as much as 25%.

It's probably for these reasons that not one of the JSE's six PUTs has as yet concluded an empowerment deal, though it's believed that Emira, also in the RMB stable, is currently negotiating with a potential empowerment partner.

Though the charter won't be legislated, property companies who don't comply with its various targets could find themselves increasingly sidelined by Government - with a property portfolio worth an estimated R120bn - and even private sector tenants, who may increasingly prefer to procure space from landlords with empowerment credentials and earn points for their own empowerment scorecards by doing so.

Last modified on Tuesday, 06 May 2014 14:02

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