And now there is a question mark over whether the market will see any empowerment deals this year.
There was a rash of empowerment deals concluded by the sector during 2005 and 2006 when interest rates were lower and listed property prices were not as expensive.
The trigger for the deals was the adoption of the property sector transformation charter in March 2006. The charter aims to place about 25% of the property market in black hands in five years.
Len van Niekerk, head of quoted property at Old Mutual Investment Group SA, says the primary reason for the slowdown in empowerment deals was the large gap between lower yields on listed property units relative to the higher cost of debt.
“Most property sector BEE deals are principally funded out of debt and the yield difference has made it more difficult,” says Van Niekerk. There was a 20% decline in listed property prices between November last year and last month, with a recovery of 10% in prices since then.
Van Niekerk says this has made deals more financially viable now as the lower prices make deals easier to fund. “We could possibly start seeing more BEE deals this year. Most of the companies haven’t got to the 25% target.”
However, Van Niekerk says a major focus of listed property companies this year will be on consolidation, which could effect empowerment deals.
“Companies may want to first consolidate and get their structures right before embarking on a new wave of BEE deals. Having said that, it is entirely possible that new or existing BEE participants could be brought into the restructuring processes.”
Keillen Ndlovu, fund manager of Stanlib, says in 2006 eight companies made equity- based empowerment deals totalling about R1,7bn. The number slowed to six companies last year, though the value of deals increased to about R2,2bn.
“Unless interest rates start falling, this year we might not see any equity-based BEE deals. The listed property sector’s forward yield is 8,5% yet funding rates are above 11%. It is hard to come up with a financing structure to close this gap.
“For example, late last year, unitholders had to take an economic cost of 1,5% to make Redefine’s BEE transaction work. Though property yields have weakened somewhat, interest rates have moved up a further one percentage point. Despite this hurdle, most property companies continue to investigate BEE transactions,” says Ndlovu.
He says that of the 22 property companies listed in SA, eight are still in the process of finding BEE equity partners. However, apart from equity ownership there are other elements that could be explored, such as enterprise development, socioeconomic development and preferential procurement.
Marc Wainer, executive director of listed property asset manager Madison Property Fund Managers, which manages listed property companies Hyprop, ApexHi and Redefine, says the gap between borrowing costs for empowerment players and the yield on units has made it harder for empowerment players to finance deals, even if units are issued at a discount of about 10%.
Yet Wainer says a lot of listed property funds have concluded empowerment deals and are “waiting for them to filter through”.
“Some funds have already done equity deals of 10% to15% and are waiting for the economic environment to improve before they do more deals,” he says.
Des de Beer, MD of listed property loan stock company Resilient, says his company is planning to propose a further empowerment deal in the next three months, to lift the empowerment shareholding in the company.
“The stronger the distribution growth of the fund, the easier, obviously, it is to do a deal. As far as BEE deals are concerned, there is a roll-up of interest for the first two years and the stronger the growth, the more quickly the deal becomes cash- positive,” he says.
