LISTED PROPERTY: WHO IS PULLING THE TRIGGER?
By Kundayi Munzara*
The South African commercial property sector has evolved over the past 20 years, with a higher rate of evolution occurring in the past 10 years.
Large commercial property assets, including office buildings and super regional shopping centres, were predominantly held by financial institutions and life insurance companies in South Africa – this may have been more about circumstance as opposed to strategy as these companies were banned from investing offshore and placed excess funds into real estate assets within our borders.
The opening up of the economy after 1994 saw financial institutions refocus their businesses towards lending and core activities and property assets in-turn became non-core.
This was not the birth of the listed property sector per se in the same way that the iPad was not the birth of electronic tablet, but it was a start to significant development of the sector. Just over a decade ago we started to see the emergence of more listed property funds led by founders or entrepreneurs who had convinced their managers sitting in corporates to sell assets to them and kick-start their huge ambitions to build property empires. Common names such as Des De Beer and Paul Theodosiou come to mind.
This period also saw banks offload their property assets in an attempt to focus on their core activities of lending to business. We saw Momentum/Rand Merchant Bank sell much of its portfolio into what became Emira Property Fund, and Investec sell its Johannesburg and Cape Town offices to beef up Growpoint Properties portfolio.
Importantly, the sector began to attract more talented professionals who began to introduce exotic structures such as swaps, securitisations and corporate bonds to enhance balance sheet- driven performance for shareholders.
There was also a higher degree of specialisation at asset level as we saw the likes of Hyprop evolve into a focussed retail fund and the listing of other funds such as Hospitality.
New ideas entered the fray around 2006 where we saw the listing of Madison, a property asset manager that held no direct assets at all. Then there was Apexhi that introduced the dual unit (A and B) structure, and the hybrid/Octopus structure where a fund, in this case Redefine and Pangbourne, held direct property assets and shares in other listed property companies.
During this period the listed property sector played its part with respect to black economic empowerment (BEE) transactions where the companies raised capital by issuing shares to BEE consortiums and arranged the funding to buy the shares with the various banks.
Growthpoint, Redefine, Hyprop, Vukile, Resilient and SA Corporate among many others, with slight variations in transaction structures, all did BEE transactions in the early to mid- 2000s. Hyprop and Redefine also played key parts in transferring skills, balance sheet support and assets to then unlisted funds Vunani (Now Texton) and Dipula Property Funds.
Many lessons were learnt over this period but one often untold story is of consortiums that “disappeared” from the sector by selling their shares once they had made their money. This may have been a missed opportunity for the start of black property empires.
Government has also played its part to promote the emergence of black property players. In 2011, the Department of Public Works (DPW) stopped signing long-term leases with established property companies or individual landlords who lacked empowerment credentials. This was a catalyst for the listing of so-called Pointing out the lack of transformation is easy.
However, the issue is complex at best and the hard work is in looking to chart a new way forward.
BEE funds, or funds with BEE credentials such as Ascension, Delta, Dipula and Rebosis, with a combined market capitalisation of R18bn (about 4% of the total market capitalisation of the sector). The listed property sector has a market capitalisation of about R400bn.
Interestingly, the South African Institute of Black Property Practitioner (SAIBPP) holds its one-day conference a few months after the Association of Black Securities Investment Professionals (ABSIP) held a similar summit that highlighted the lack of transformation in the financial services industry, with particular reference to the asset management sub-sector.
The SAIBPP gathering will likely face a similar scenario. At the aforementioned ABSIP conference, Mazi Capital founder Malungelo Zimbola highlighted that BEE may not only be about ownership of companies but about “who was pulling the trigger”. Are there black people in key leadership positions actually determining the direction of investments?
So, on one hand, most of the dedicated property asset management teams have black people in key positions of allocating capital into the sector. These companies have been entrusted by pension funds and retail investors to invest on their behalf.
Buy-side listed property teams such as Sesfikile Capital, Meago, Stanlib, Momentum and ABSA have a majority black investment teams “pulling the trigger” and making the asset allocation/investment decisions, irrespective of the ownership at company level.
Furthermore, some of the top sell side property analysts, including Naeem Tilly at Avior, Vincent Anthonyrajah and Bandile Zondo at Standard Bank, Nazeem Samsodien at Macquarie, and Anil Ramjee at Vunani are black– this is an important development.
However, on the other hand, the industry lacks transformation at all levels from CEOs of companies,developers, contractors, direct property asset managers. In fact of many shopping centres in SouthAfrica, despite full of black patrons, only have a handful of black companies managing or black people as centre managers. It is easy to pick out the minority black leaders at executive level in the property market, including Rebosis’ (and soon Ascension’s) Sisa Ngebulana, Dipula’s Izak Peterson, Sandile Nomvete of Delta Properties, Sedise Moseneke of Encha Properties, Antonette Basson of SA Corporateand Ridwaan Asmaal of Hospitality, Imraan Suleman of Arrowhead – it should not be this easy to name them.
Pointing out the lack of transformation is easy. However, the issue is complex at best and the hard work is in looking to chart a new way forward. The DPW’s policy of giving preference to black property players played a meaningful role but this is only one tenet of what should be a multi-faceted strategy.
There should be a way, either directly from government or a government-linked DFI (Development Finance Institutions) or Pension Funds, to fund black property professionals looking to build up portfolios. In a classic property deal, around 30% to 40% equity is required and this is where many black players have fallen short and banks are currently unwilling to relax these parameters, which is well within their rights as private entities.
What the government can do for a period of time is serve as a guarantor for the 30% – 40% equity required, almost as a “Big Brother” to ensure that a transaction can be completed and the bank is on the hook only for the 60% – 70% loan portion. In addition, banks should retain their role in approving/disapproving transactions which may limit the risk of government- linked players getting a large portion of the deals.
In addition, in a similar fashion to Redefine’s spin-off of Arrowhead, or some transactions that have led to listings of funds like Tower Property Fund, the Public Investment Corporation, Transnet or other state-linked enterprises may initiate property listings by off- loading non-core assets to black property entrepreneurs while retaining a significant minority shareholding.
Non-black property entrepreneurs have not always had the capital themselves but they have successfully initiated transactions using a “Big Brother” to give them a “leg up” – this can be replicated in the black community with the help of government.
The property sector has gone through a period of rapid innovation, but in the process it has largely remained with poor levels of economic and skills transformation – with the correct policies and implementation strategies, real economic and skills transformation may be the next wave. What the future holds is a new model for BEE, it’s clear that gone are the days when black participants are funded to buy shares and serve as non-executives on boards. If anything, the aforementioned pioneers in Sisa, Izak and Sandile have shown us that BEE cannot be a business model alone, but the fact that one has BEE credentials enhances an already sound model in this competitive environment.
*Kundayi is a fund manager and director at Sesfikile Capital, an investment management house focused on listed property asset management in South Africa and abroad.