Old and nowhere to go

Posted On Monday, 13 September 2004 02:00 Published by eProp Commercial Property News
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Ageing SA portfolios drag down incomes, but sclerotic management is the killer


Property-Housing-ResidentialAge is the quiet blight on the JSE listed property sector, a growing problem that is hardly ever mentioned.  But new accounting rules, and investors who are more demanding, are making it the issue of the day. 

Some of SA's once most desirable shops, offices and factories have lost their allure.

Many were acquired in the 1970s and 1980s when the Cenprop, Capital, Barprop, Pioneer and Tamboti funds were listed. 

With age has come spatial inflexibility, too little parking, outdated air conditioning, unfashionable facades and the inability of locations to attract modern industry or business. 

Newer funds have swallowed up the early ones, but old properties still make up as much as 80% of some of the sector's high-flying property loan stock (PLS) and property unit trust (PUT) companies. 

The hard core of older properties was assembled in the hothouse climate of economic sanctions in the 1980s, when the large insurers and pension funds that dominated the sector gave no thought to ever selling their properties.

Asset management and the idea of "sweating" properties for maximum return came only in the late 1990s, when funds were already loaded with properties in their dotage.  It was then that more entrepreneurial property managers started taking over the JSE's real estate sector. The burgeoning office and retail markets of the 1990s provided new stock for a growing number of funds. 

The funds knew it would have been better to dump large chunks of the older stock. But in a market that had been declining for 20 years, there was not enough new to replace the old.  There's another problem peculiar to the sector, says Pangbourne CEO Atholl Campbell. Most listed companies pay only a portion of their cash flow in dividends and they build up reserves, he says. But PUTs and PLSs pay almost all their cash flow to unit holders.

"New accounting rules even prevent us from keeping maintenance reserves," he notes. "So money we spend on properties deprives investors of their dividends." 

Investors can spot the symptoms of old age from the funds' annual reports, says property consultant Niki Vontas: "Their individual property values are less than the sector average [see table]. Their rents are lower, but they cost more to run. And their tenants are usually on shorter gross leases with few cost recoveries." 

The most obvious signs of age are evident from Pangbourne, SA's first PLS, listed in 1987 (properties averaging R4,3m in value and averaging gross rent of R17/m²/month); PLS Premium (R4,8m, R20/m²); and unit trust Capital, listed in 1979 (R7,3m, R18/m²). Compare these with two of the top funds, Sycom (R67,5m, R73/m²) and Hyprop (R128,9m, R77/m²). 

The total PUT and PLS portfolio of 1 940 properties averages R15m in value each, and R38/m² in monthly rent. But the funds mentioned above are not the only ones below the norm.

ApexHi, Arnold, Octodec and Prima also have many old properties.  Vontas calculates 83% by number for ApexHi and 84% for Pangbourne (after moving the newer 25% of its portfolio into iFour). Even well-established funds like Marriott (with 74%) and Metprop (80%) have a high component of older properties.

Even blue chip Grayprop has 38%, he says.  And as Campbell points out, being old in itself is not bad: "The problem is when it is old with nowhere to go."  Marc Wainer, director of Madison (which manages ApexHi and Prima), points out that old buildings in Europe are constantly being gutted and rebuilt behind their ancient facades to become high-rent offices, shops and apartments. 

Vontas says the new managers have had two choices with these old properties: sell them or reincarnate them as something new.  Neither is easy. There are not enough new properties coming on stream to replace the old stock, and converting old properties would use funds that investors want as payouts.

What SA asset managers do about all their old properties is the test of their mettle. 

Sycom, managed by Corovest, has successfully taken the first course, culling older properties in the past few years and bringing its portfolio to a 50% split between modern shops and modern offices. It won the Investment Property Databank awards for best performance in both these types of properties last year. 

ApexHi and Prima, both managed by Madison, have actually embraced older properties, but at yields and with management models aimed at making them desirable.  ApexHi built its portfolio on properties in secondary locations but with good tenants. Smart structuring has allowed it to give investors enormous returns.  In a couple more years, the original unit holders in ApexHi will have payback of their initial cost - and they will still be shareholders with growing income.

Analysts were scathing about the ApexHi risk, but last week the "high-risk" ApexHi B units were selling at a premium to the "low risk" A units. 

ApexHi has developed a special management team through Broll to defy the laws of property geriatrics. It is converting obsolete offices in the CBDs to residential accommodation. So is City Properties, manager of Premium.

It is converting obsolete offices in Pretoria CBD into benchmark residential units that have enhanced income.  Prima was moribund before Madison bought it. Management has sold six of its eight long-held properties and is buying up all properties worth less than R15m apiece.

These are generally older properties that other funds want to shed because they are too small to bother with. It has a special "mom and pop" franchise model to ensure hands-on management. 

Campbell says good asset managers will decide which properties they can profitably improve, selling the rest.  "We sold Horizon View shopping centre in Roodepoort to ApexHi, and Maynard offices near Cape Town to Spearhead, because they are not part of our expertise," says Campbell. "Some buildings are so obsolete you just have to pull them down."  Pangbourne did this in Isando. It demolished some buildings to create more yard and vehicle turning space. "This gave us a 16% yield on the cost of improvement." 

Occupancy of Pangbourne's industrial holdings in Benrose, Johannesburg, once the blue-chip portfolio of Pioneer Fund, was increased from 68% to 92% a few years ago by improving the security. Gross rents for the 200 000 m² space now average about R10,50/m², up from R7,50/m². 

This sort of creativity was rare among the old institutional managers and has triggered similar behaviour from large insurers, as in Old Mutual's conversion of Cape Town offices to hot-selling CBD flats. Whether they have truly embraced the entrepreneurial spirit has yet to be seen.  


Last modified on Monday, 12 May 2014 17:59

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