a merger with the smaller SA Retail Properties expected to be finalised shortly, as well as the absorption of a R1bn property portfolio in the pipeline, SA Corporate is poised to become the third-largest listed property fund on the JSE with a market capitalisation of more than R7bn.

The fund recently announced a R636m empowerment deal that will see a consortium consisting of Wiphold and Kensani Properties acquire an 11% interest in SA Corporate.

Property analysts agree that SA Corporate has fulfilled its objectives. It remains to be seen whether SA Corporate, under the management of Old Mutual Property Investments, can deliver good earnings growth in the future.

Macquarie First South property analyst Leon Allison says SA Corporate is “definitely one of the stocks to keep an eye on”, given that it is going to become one of the largest funds in the listed property sector and because of Old Mutual’s involvement and its new empowerment deal.

“In the last few months there have been many changes, and it’s a very different fund going forward compared with the old Martprop,” says Allison. He says the fund is going to be more retail-focused but with significant industrial exposure. Previously, Martprop was predominantly a KwaZulu-Natal-focused industrial property fund. “Now it has more diverse geographical exposure,” says Allison.

Of SA Corporate’s plans to grow its market capitalisation to R10bn in the medium term, Allison says SA Corporate is “probably assuming” it could make portfolio acquisitions.

“It would be difficult to grow organically by that much in the short term,” he says.

Evan Robins, head of fixed income at BoE, says the merger between SA Retail and SA Corporate made a lot of sense in terms of Old Mutual’s strategy of having a big property fund diversifying away from industrial property. But he says SA Corporate still wants to grow, and is a bit unbalanced in terms of its office exposure.  “They are underexposed to offices. They want to be a more balanced fund.”  Robins says SA Retail’s portfolio consists of retail property only, while the former Martprop portfolio consists of industrial properties with some retail exposure.  “They (SA Corporate) are going to have to look at introducing more offices if they want to have a more balanced fund,” says Robins.  “Their strategy has been to grow the fund’s size, but for unitholders the key question is whether they can have superior returns.”

Martprop has over the past few years been a poor performer in terms of distribution growth because of negative reversions on leases.  These reversions occur when long industrial leases, which had been escalating at 11%-12% each year, expire.

The then Martprop found itself with closing rentals that were significantly higher than market renewals.  On renewal, the fund was forced to negotiate the rentals back down to market.

Robins says the fund is “now totally different”. He says Old Mutual has a lot to prove because SA Corporate is the group’s flagship listed fund, and “its reputation could be enhanced if it does well”.

Andre Stadler, MD of Catalyst Fund Managers, says SA Corporate has achieved a number of its strategic objectives that it communicated to the market, among them significantly increasing the size of the fund through the merger with SA Retail.

Stadler says Catalyst’s expectations are that the structuring of the merger deal will “result in significant growth in distributions for the 2007 financial year end”.

“The key feature will be their ability to deliver beyond the current year. We have a new structure, a new fund, and we are expecting distribution growth to be a lot higher this year as a result of the restructure.” But he says this will create a higher base from which SA Corporate will need to deliver in the years to come.