Unlisted property sector holds some of SA’s most prized assets

Posted On Monday, 27 May 2013 09:33 Published by Commercial Property News
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Although the South African listed property market is 48 times the size it was 12 years ago, the unlisted sector remains substantial, holding some of the country’s most prized assets.

Francois VirulyAnalysts say some of these assets and funds could find their way into the listed space, which has become increasingly competitive with a lack of quality stock available to buy.

The market capitalisation of the listed sector has grown from R5bn in 2001 to R240bn today.

But Growthpoint Properties, the JSE's biggest property group with assets of R55bn, is smaller than the Public Investment Corporation's (PIC's) unlisted property portfolio, which is worth R60bn with direct and indirect holdings.

Jess Cleland, South Africa research director at Investment Property Databank (IPD), says the IPD estimates that about 54% of the country's professionally managed investment property is listed — referring to property held to receive rental income.

This means "a significant portion of the market is unlisted", Ms Cleland says.

Most of the big players in the unlisted space are either insurance companies or pension funds, including Liberty Properties, Old Mutual Property, Sanlam Properties, the PIC, Momentum Property Fund and Sasol, and listing may "not be an option for some".

However, some of the private players "may consider listing".

Ms Cleland says the corporate property market — referring to companies such as banks and telecommunications groups that own property to carry out their business — "is another sector altogether, which is probably larger than the investment market".

"There may be potential here for sale and leasebacks as companies free up their capital instead of having it tied up in the property that they occupy," she says. "It will all just depend on the strategy of each company."

Thomas Matlala, president of the South African Institute of Black Property Practitioners, says if the government sells its "non-core" and "non-strategic" property assets to black economic empowerment (BEE) groups, the listed sector would grow significantly and transformation would be boosted.

While the sector has seen transformation since the 1990s, only about 5% of government leases are through BEE participants, he says.

Property groups that have been tipped to list in the near future include Atterbury Investment Holdings, Accelerate Property Fund and a new BEE group that wants to list after it acquires 24 of Redefine Properties' government offices.

Unlisted prime property

Property economist Francois Viruly says about 20 years ago, the unlisted pension funds were the biggest players by far.

While much has changed, "there is still a lot in the hands of the unlisted pension funds", including some of South Africa's major shopping centres.

"There is still some very prime property in South Africa that is not listed — probably some of our best properties," says Mr Viruly. For example, Sandton City shopping centre is majority held by Liberty Properties, while Old Mutual Property holds Gateway Theatre of Shopping in Durban and Cavendish Square in Cape Town.

Given the changing dynamics of the sector, "and if the past is anything to go by", a number of these funds might be "tempted in due course to list those properties in one form or another".

Mr Viruly says the pension funds are "starting to play an important role across the African continent", where some funds are more active than most of the listed sector.

He adds that some of these funds could list in the next few years, after the new real estate investment trust (Reit) structure has "bedded itself down". It is also possible that some of these large funds could exchange direct property assets for indirect holdings over time, given the simpler nature of indirect holdings and the attractive returns of the listed sector.

But he adds that the pension funds have an opportunity, given their access to "patient money", to expand elsewhere in Africa.

Alternative Real Estate fund manager Maurice Shapiro says thanks to the tax benefits of Reit legislation, which is only applicable to the listed sector, some unlisted property groups may want to list.

The tax advantages, specifically the removal of capital gains tax, also means an unlisted fund is more likely to sell assets or portfolios to listed groups rather than to other unlisted businesses, says Mr Shapiro.

The listed company might also be willing to pay more for a portfolio thanks to the Reit tax advantages as well as its ability to raise capital more easily.

Reit legislation "slightly prejudices unlisted funds and gives an advantage to listed funds", according to Mr Shapiro. "It's less significant for the big pension funds to want to list their assets, but for the private developers and investors it makes sense."

However, the effect of these tax breaks on large pension funds is more "muted", meaning these pension funds are less likely to feel pressurised to list than private investment companies.

Investec Asset Management research analyst Peter Clark says the listed sector is likely to be only a third of the overall market, depending on how government-owned stock is calculated.

While there are a number of quality portfolios that may list in the near future, Mr Clark says the market is now "a lot more discerning" than a few years ago, when small funds were listing frequently. "You do have to come with a certain size and critical mass to gain traction, particularly with the institutional funds."

Although there is scope for some of the private groups and larger pension funds to list, an entity such as the PIC's property arm is unlikely to do so, as it already has large capital reserves looking for a home.

"The biggest reasons to list are to get access to either more capital or liquidity, and they don't require either of those so there's really no reason for them to list," says Mr Clark.

He also says there is potential for some unlisted groups to sell assets to listed players, if they do not list themselves. Private developer groups could sell assets to "recycle capital" for further investments.

The "owner-occupier" market is also large, although the attractive assets that listed property funds would want to acquire would be large company head offices, most of which are already owned by listed players.

An analyst who cannot be named in line with his company's policy says it is an attractive time for unlisted property groups to list, thanks to the introduction of the Reit legislation and the sector being expensive.

Listing in the current environment allows property companies to "get the most out of their assets" and take advantage of low yields, the analyst says. "It's a nice 'exit strategy' sometimes when the markets are inflated."

Companies are taking advantage of the expensive market and "exiting the private portfolios or private stakes in these companies, and becoming more liquid".

"It's an opportune time to list, but I think a lot of investors will be wary of that and hence will be very selective in what they buy," the analyst says.

Listing and raising equity capital allows companies to "raise debt at interest rates that are very attractive", given the increased size of a listed company.

"Debt interest rates are much more attractive if you're larger," says the analyst, "and that's one of the arguments why some of these companies like to grow quickly — it's not the primary reason but it does give access to cheaper funding."

Source: BD

Last modified on Monday, 27 May 2013 09:49

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