Growthpoint plans alternative method of funding

Posted On Wednesday, 14 July 2004 02:00 Published by eProp Commercial Property News
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Mortgage securitisation likely to be the next big thing in listed property sector

Norbert SassePROPERTY loan stock company Growthpoint Properties, the biggest fund in the listed property sector with property assets of R6,7bn, is planning a commercial mortgage-backed securitisation initiative which could lead to Growthpoint bonds being listed on the Bond Exchange of SA in the next six to 18 months.

This would make Growthpoint, which is managed by Investec Property Group, the first listed property fund to take this step and it is expected other large property unit trusts and property loan stocks will follow.

Commercial mortgagebacked securitisation, or debt securitisation, is an alternative source of funding to conventional bank loans. Securitisation is the conversion of mortgages into tradable securities.

During a site tour of Growthpoint's properties in the greater Gauteng area last week, executive director Norbert Sasse explained that it was a structured funding mechanism whereby Growthpoint could access institutional debt funding from the likes of Old Mutual, Sanlam and Investec Asset Management. It would also be a mechanism whereby Growthpoint's securitisation vehicle would issue mortgage-backed notes rated by a recognised rating agency and listed on the Bond Exchange of SA.

Sasse said the reasons Growthpoint wanted to follow this option included the strong institutional demand for rated term paper; the control it gave the company of the funding process and the access to alternative and diversified funding sources.

He said it was a cheaper source of funding and would reduce Growthpoint's borrowing costs. It would also give the loan stock company a competitive advantage and increase distributions to linked unitholders.

Andisa Securities property analyst Len van Niekerk said it was hoped there would be more of these initiatives from the listed property sector. Van Niekerk said it was cheaper to finance with debt at the moment and securitised debt was the cheaper form of debt.

At commercial property association Sapoa's annual convention held in Cape Town in May, listed property portfolio management company Provest, which is part of the Investec Property Group, said it was expecting debt securitisation initiatives from various property listings.

Angelique de Rauville, MD of Provest, said at the time that debt securitisation would reduce the costs associated with the existing and future financing activities of many of the property companies and funds. The cost of financing properties would be reduced, earnings growth would be enhanced and a subsequent rerating in unit price could be expected, she said.

Following the Sapoa convention, Colin Young, fund manager of Old Mutual's South African- listed property funds, pointed out that in the US the size of the debt securitisation market among real estate investment trusts was about $500bn.

Young said there was a market for debt securitisation because the debt could be offered at a higher yield than traditional government-issued long bonds. If the bond defaulted, the person invested in the bond could acquire property and sell it to get their money back, making it a secure investment.

He said the only downside was that property funds would have to "ring-fence" property assets because they were then defined as assets to back the bond. Ringfencing links the debt with the asset and includes credit-rating the entire asset, as well as the tenants occupying it.

Young said that bigger funds, such as Growthpoint, Sycom, Martprop and Grayprop, had bigger core assets, which were properties they did not want to sell. Because the portfolios of such funds were so large they could afford to ring-fence the core assets and would raise a lot of money.

Last modified on Wednesday, 14 May 2014 14:16

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