Stephen Cranston

Only the competition commission stands in the way of the listing of an enlarged Redefine on the JSE

When Redefine absorbs ApexHi and Madison, it will be the second local property share, after Growthpoint, to make the Alsi 40 index. On current valuations Redefine will be the 34th largest share on the JSE.

According to Kundayi Munzara, at Investec Property, one of Redefine’s largest shareholders, it will have R22bn in property assets and a market cap of R19bn. Growthpoint and Redefine will account for 43% of the market cap of the SA property index.

The relisting will put an end to two unique counters on the property board. ApexHi focused on secondary assets, primarily in CBDs. Its office portfolio includes Poyntons and home affairs in Pretoria, where government is the main tenant.

Madison was the only specialist property asset manager on the board. Its main asset was the reputation of its founders, Marc Wainer and Wolf Cesman. The market was not keen on a property business with no tangible assets, and after the deal Madison shareholders will have swapped their position in an intellectual capital business for bricks and mortar in Redefine. And Wainer and Cesman will be joint CEOs of the business, locked in by contract for at least three more years, with the option of a further two.

“We need to increase profit by R25m to increase distributions by 1c/share. So it is important not to focus on the peripheral stuff too much,” says Wainer.

He says there is too much exposure to government as a tenant in the combined business. “We will need to consider a separate listing of our government properties with our various black economic empowerment partners.”

A key factor, which shareholders are watching, is how the management team settle in their new roles. In particular, Brian Azizollahoff, the current Redefine head, is stepping down in favour of the (somewhat older) Wainer and Cesman.

The rising star might well be David Rice, the former MD of ApexHi, who will be head of operations.

“David is so focused on operations that when he finds that a tenant in Spartan has underpaid by R300 on electricity, you would think he had won the Lotto,” says Wainer.

The Redefine merger was undoubtedly the plan B. Last year, the merger negotiations included Hyprop, the specialist shopping centre manager, which owns Canal Walk, Hyde Park and The Mall of Rosebank.

But the shareholders made it clear that they wanted Hyprop to remain as a focused listed company with just six properties.

Redefine’s retail flagships will be commuter centres, served by minibus taxis such as Golden Walk in Germiston and Maynard Mall in Wynberg, Cape Town.

The only exception will be Park Meadow, behind Eastgate on the East Rand, which will come into the fold if ApexHi’s bid for Ambit is approved.

And though Redefine has A-list properties such as Standard Bank Centre in Cape Town and 90 Rivonia Road, Sandton (the Alexander Forbes head office), its office portfolio doesn’t have the prestige of Growthpoint’s flagship properties such as the Investec head office and The Place in Sandton.

Evan Jankelowitz, fund manager of the Stanlib Property Income Fund, says there are concerns about the quality of Redefine’s income. These arise from the trading profits in developments built for sale, such as the Oasis retirement village in Cape Town.

But he argues that the group’s unglamorous retail portfolio is a source of strength. “The commuter centres will still get feet through the door buying their bread and milk. But people will not be going to the La Lucias and Hyde Parks as much for high-ticket items.” He still expects growth in distribution (dividends) from Redefine of 17% in 2010, giving it a forward yield of 12%.

“It is quite an attractive yield pick-up of 2,5% from what Growthpoint offers. Redefine has a lower-quality portfolio, but that spread overstates it.” Especially as Growthpoint, at 36%, has higher gearing than Redefine, with 25%.

Redefine is still a 30% shareholder in Hyprop and is renegotiating its management contract. Hyprop was managed by Madison but is now in the awkward position where the contract is held by a competing property fund. Redefine and Madison may find themselves competing, for example, for the Melrose Arch complex in northern Johannesburg if it comes onto the market.

“The day-to-day management of Hyprop has been brought in-house,” says Hyprop chairman Mike Aitken. “But we hope that we can maintain a relationship with Marc and Wolf, who have made a strong contribution to the business over the years.” Madison had been responsible for reeling in the big fish for Hyprop, notably Canal Walk, which accounts for 45% of Hyprop’s assets.

A consulting contract for Wainer and Cesman on a much lower fee looks the likely outcome.

Are there going to be more mega property funds? The Resilient/Capital/ Pangbourne

“There are benefits of increased liquidity,” says De Beer, “but international best practice is towards focused funds, specialising in industrial, retail or offices, rather than a hybrid.”

Another possibility is a mega retail focused fund if Hyprop merges with Sycom (in which it already holds 40%) and the funds controlled by the businesses that control Sycom, Acucap and the unlisted Attfund.

We could end up with a property sector having fewer than 12 shares.

Source: Financial Mail