Property fund CEOs are concerned that economic and business conditions are so poor that the listed property sector will achieve very weak returns this year relative to recent years.
SA Commercial Prop News has learned some news that they feel that they have to very careful this year in order to generate returns for their shareholders.
Recently the South African Real Estate Investment Trust (Reit) conference was held at the Maslow Hotel in Sandton, where various concerns were raised about the current state of the sector.
They said that economic growth was weak in SA with the economy set to grow less than 1% this year.
The CEOs also said they would do more in their power to attract offshore property investors to SA.
Mark Stevens, the head of marketing for the SA Reit Association said his team was committing more resources to attracting investors from abroad.
“We are facing so many headwinds but I believe political risk is the biggest one across Africa and South Africa too. We have lost or rulebook in SA. We need a rulebook. We will put our money where there is a rulebook,” said Stevens who is also the CEO of Fortress Income Fund.
Political uncertainty was highly concerning in South Africa, according to a number of CEOs and market leaders at the event. When President Jacob Zuma fired the Minister of Finance, Nhlanhla Nene suddenly and without proper reason last year, investors lost a lot of faith across SA. There was some flight of capital out of South African property funds by South African investors, said Redefine Properties Andrew Konig.
“It was actually South African investors who sold out of Redefine a bit so yes, there was some reaction to ‘Nenegate’ last year,” he said.
There are also concerns about President Zuma’s relationship with the Gupta business family. The CEOs are concerned that the Gupta family has bearing on cabinet and ministerial appointments.
Dipula Income Fund CEO Izak Petersen said South Africa was relatively very expensive for investors.
“It is very expensive to invest here. Rentals are artificially high. Right now it makes sense to spend money on managing existing properties. We have also increased the size of our management team so that we can maximise returns for our shareholders,” said Petersen.
Norbert Sasse, the CEO of Growthpoint Properties, the largest South Africa based Reit, said that most investments from abroad into SA’s Reit sector were by index trackers.
“We are not seeing direct buying of property funds and assets from abroad. We are seeing index trackers buy exposure by buying into indices which larger Reits have joined,” he said.
More offshore companies may also list funds in SA according to Maurice Shapiro, head of Ma’alot Investments. They may want to get into Reit indices and to attract offshore investment from index trackers.
Fortress Income Fund, which was the best performing Reit last year in SA, became an attractive investment for offshore institutions when it enjoyed fast track inclusion into the MSCI emerging markets index.
MSCI is a US-based provider of equity, fixed income and hedge fund stock market indices, and it fast-tracked Fortress’s inclusion in its emerging markets index.
This forced global index trackers to buy Fortress, leading to rerating for the company and also boosting its share price.
Many funds globally see gaining Reit status as a very important goal. Reits pay out the majority of their income to shareholders. They are seen as being highly reliable and having met strict criteria to be given Reit status. They, for a start, are not overly geared, CEO of Emira Property Fund, Geoff Jennett stresses.
Some commentators on the side-lines of the conference said they expected some property companies to delist from the JSE.
This is because it can be too expensive for some funds to raise capital at current prices. Also some funds have created an expectation that they will deliver double digit returns or close to double digit returns in terms of distribution growth but they may come short. They may have only delivered it in the past because of the effects of acquisitions which they cannot recreate now.
Some funds just listed because it was easier to gain shareholder support in the past couple of years but the game has changed. Funds with portfolios worth about R1bn are struggling to gain economies of scale in their businesses. They may not have enough options of assets for potential acquisitions at current prices. They could need some assistance and delisting or them being taken over could be the solution.
One of the heads of Flanagan and Gerard, a property development company, Patrick Flanagan, said at the conference, that some challenges were manageable for the industry.
Part of these are related to working with the state be said. He said often the state was under-resourced or needed guidance.
“You can either complain or work with the government. We can help them to do their jobs better. We must guide and not become antagonistic,” he said.
He said property development especially in the retail sector, was a risk management business.
Flanagan said the state must be used as a catalyst for projects.
Further, he urged property companies to manage properties better and not to just focus on growing on their funds.
“I see so much corporate activity in this sector but I see gross mismanagement of properties. There is in some instances, wholesale destruction of value,” he said.
Andrew Brooking, one of the founders of Java Capital, said while risks remain in SA, including the weak and volatile rand, no risks last forever.
“We remain in cycles. Bad things do not last forever,” he said.