Pricing challenge for listed property

Posted On Thursday, 17 May 2007 02:00 Published by eProp Commercial Property News
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Property companies are expected to find it increasingly challenging to facilitate BEE deals

Norbert SasseWith listed property prices soaring, property companies are expected to find it increasingly challenging to facilitate black economic empowerment (BEE) deals in an expensive market.

With empowerment an imperative for property companies in line with property sector transformation charter requirements.

Listed property companies that have not concluded empowerment deals yet may be forced to offer units at discounted prices to facilitate them.

This may upset existing unitholders because of the possible dilutionary effect of this practice.

Norbert Sasse, chairman of the Property Loan Stock Association (PLSA) and CEO of the JSE's largest property company, Growthpoint Properties.

The listed property sector is at record unit price levels, notwithstanding the fact that prime interest rates have risen 2% points over the past 12-14 months.

Sasse says debt funding has become more expensive, which will make funding empowerment deals in the listed property sector more expensive.

"In order for them (black economic empowerment deals) to work, there will be pressure on listed property companies to issue units at a discount to BEE partners to facilitate the transaction."

Growthpoint, which is the largest property company on the JSE with a market capitalisation of about R17 billion, has already concluded two empowerment deals.

Sasse says discounting units would not be dissimilar to what is happening with other companies on the JSE that have concluded empowerment deals.

"A lot of other non-property companies have done empowerment deals through the issue of shares at a discount and therefore at a cost to shareholders.

"If there is a real imperative to have empowerment in the property sector, as there is in all sectors of the economy, then why should property be different?"

Sasse says if there is a cost to unitholders because of discounting, it would "surely" be reflected in the unit price, which could dip.

Recovery of the unit price would depend on a number of factors. "Some guys might do it (the deal) at such a discount that shareholders get unhappy and sell out," says Sasse.

He says the recovery also depends on what the market thinks of the empowerment deal a property company has concluded and whether the discount was excessive or whether the empowerment partners can add value.

Another concern that has been raised is that if an empowerment partner buys into a listed property company when its units are trading at record highs, what happens if the market turns and prices plunge?

Would this not make paying back the loan used for the transaction that much harder?

Sasse says empowerment deals should all be long-term in nature.

"The short-term volatility in the (unit) price shouldn't affect the deal.

"Because it's property, the idea is because there is a constant income flow (from the regular distributions paid out by the company concerned), that this income will be re-used to pay the debt.

It's like a home loan.

You use the income to pay off a loan and after 10 years you own the units."

Macquarie First South property analyst Leon Allison says there are about 25 listed property companies and that about half have concluded empowerment deals.

"If you look at where property yields are trading relative to debt funding yields, it would be difficult to do deals that are self-funding from the outset.

I think the challenge is to do deals that are not dilutive to existing shareholders," says Allison.

He says there is a possibility that companies that have not yet concluded deals may have to do them at some kind of discount to current prices.

Musa Ngcobo, chairman of commercial property association Sapoa's transformation committee and a member of the Property Charter Council, which is overseeing the implementation of the charter in the property sector.

He says that in statement 100 of the trade and industry department's codes of good practice for empowerment deals, one of the line items envisages and recognises the need for discounting by companies to facilitate empowerment deals.

Ngcobo says that in terms of the codes of good practice, companies would also score points for discounting.

He says that while companies may have to discount to facilitate a deal, they would also receive recognition in terms of points on their empowerment scorecards and in this way also receive benefits.

Last modified on Thursday, 24 April 2014 15:32

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