Wanted: quality properties to expand listed funds

With privately owned funds offering stiff competition for assets, many listed funds are turning to development option

ONE of the most important challenges facing the listed property sector is where it will source commercial properties.

Although the listed property sector has grown substantially in the past three years, there is a need for quality properties to boost the market capitalisation of the sector and make it attractive to investors in terms of liquidity and tradability.

In the present climate, listed property funds are finding it difficult to compete with private investors when it comes to acquiring properties.

The main reason is that private investors are more willing to pay the expensive asking prices in the commercial property market, while listed property funds are loath to pay them because of the dilutionary effect the acquisitions would have on distributable earnings to unitholders.

With no end in sight to the retail boom that has le d to a massive increase in demand for space by national retailers, listed property funds with large retail exposure are particularly keen to get their hands on new retail centres coming to market. However, developers either form private funds and hang on to the properties or put them on the market with huge asking prices.

There are a number of options facing the listed property sector.

One option that many funds, particularly those with large exposures to retail properties, already exercise is to redevelop the shopping centres in their portfolios to allow for expansion by national retailers.

Another option many funds will have to consider is to develop their own new properties.

Colin Young, fund manager of Old Mutual's South African-listed property funds, says that three years ago the listed property sector was worth R8bn in terms of market capitalisation. Now the sector is worth about R30bn .

Young says the need for products such as listed property is enormous. There is no question of whether there are enough investors to support an enlarged listed property sector, he says. "If we create the product the investors will be there."

He says there are only four sources from which new properties, in particular the sought-after huge regional retail properties, can be obtained.

One source would be institutions such as the large insurance groups and pension funds. But these like the big assets and do not really want to part with their retail properties. Institutionowned retail properties are generally better quality than offerings in the listed property sector. If institutions placed their properties in the listed property sector it would undoubtedly boost the sector in terms of quality, he says.

The second option would be to approach corporate SA, which owns a huge number of quality properties. But the corporates are happy to keep their properties because of the present boom conditions, says Young.

The third option is to buy from private investors, who are asking exorbitant prices.

Young says the best option is for the listed property sector to either redevelop its own properties or initiate new developments.

Resilient Property Income Fund is one player that has used the new-development option.

But Resilient CEO Des de Beer says it is a challenge to find the development opportunities and protect a listed property fund from the inherent risk this entails.

Resilient has partnered with developer Louis Peens of Keystone Investments, who has guaranteed returns for a 27500m² shopping centre being developed in Kimberley.

Roger Perkin, MD of listed property unit trust Martprop, says many corporates are holding equity stakes in property and now is the right time for them to realise profits by selling while the market is at its strongest.

Perkin says development is an option. Martprop is busy with two new retail developments in Western Cape and an industrial development in Gauteng.

He says there is risk involved in new developments but points out that Martprop is doing the development itself. With no profit to be paid to a third-party developer, it translates into higher initial yields.

One of Martprop's new retail developments is a 10500m² shopping centre in Stellenbosch. The other is a 7500m² shopping centre at Tokai, which Martprop is jointly developing with listed loan stock South African Retail Properties.

Sycom, one of the listed property funds with superior properties in its portfolio, has been developing its own new properties for the past 10 years. Sycom MD Gerald Nelson says the fund has its own in-house development skills and can bring new developments on stream that have better yields and are of a better quality than, for instance, developerdriven development projects.

"Quality office buildings and retail properties are not readily available in the market and that's why we have gone the development route," Nelson says.

Article By: Property Reporter