Funds struggle with high Gauteng prices

Posted On Thursday, 03 February 2005 02:00 Published by eProp Commercial Property News
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Listed property funds are loathe to pay high asking prices for quality properties selling at low yields because of the dilutionary effect it would have on their earnings.

Property-Housing-ResidentialProperty commentators now suggest that new funds and private investors start looking towards areas such as Nelspruit, Bloemfontein and Port Elizabeth.

The downside is the extra costs that listed property funds, most of which are based in Johannesburg, could incur as they may have to employ managers in other centres.

The expensive commercial property market was highlighted recently by the management of new listed property company Calulo Property Fund .

In September last year, it was announced that Calulo Properties, a company controlled by empowerment group Calulo Investments, had agreed to buy 95,5% of the issued linked units in Annuity Property Fund, which was effectively a shell company with one property in its portfolio.

In November last year, it was announced that Annuity's name would be changed to Calulo Property Fund.

The fund recently said it would buy about R370m worth of properties for its portfolio.

Speaking at the investor presentation last month, Calulo Property Fund CEO Richard Harman said only 35% of the company's property portfolio was based in Gauteng.

He said most listed property funds had 70%-80% of their portfolios located in Gauteng.

The reason for Calulo Property Fund's limited spread of properties in the province was that vendors were "very aggressive" in terms of pricing because most funds were in Johannesburg and looking to grow aggressively.

" Prices are so high because everyone is chasing the same assets and that's why we've gone off the beaten track in order to acquire assets that still represent value in the current overheated market," said Harman.

Calulo Property Fund has looked to other provinces in SA and managed to pick up quality properties in towns and cities such as Uitenhage, where it purchased the Goodyear factory.

Victor Schroeder who, together with John Ferrans, owns Property Investment Consultants & Advisors , concurs that the physical property market in Gauteng is a "very difficult market".

The company was a consultant to Calulo when the company was on its property drive.

"We worked very hard to get those properties," said Schroeder. "We did a detailed analysis of between R2,5bn and R3bn of properties to get a portfolio of R371m."

He said the yields on direct property have dropped just as quickly as bond yields. In other words, physical property prices have gone up just as quickly as bond prices.

"Normally there is a sixmonth lag," he said.

The performance of property tends to track the performance of bonds because both are incomegenerating investments.

Schroeder said that property owners in Gauteng had been pricing their properties a lot more aggressively. "Finding quality property stock at reasonable prices is very difficult."

Schroeder said that in the past it was easier for private funds to buy property using cash, while newly listed property funds struggled to find good quality properties at a reasonable price as they used units as part payment and high-priced property diluted their earnings.

"The way forward is to look at different segments of markets and not just chase the same assets everyone else is chasing. You have to concentrate on value."

Dave Green, MD of commercial property brokers Pace Property Group, said it was a seller's market in the commercial property sector.

"The sellers are in the best position," said Green. "Where they had a property for sale they usually would have had a few buyers chasing the properties. Now there are a variety of buyers in the market, some of whom are prepared to pay a premium."

He said some of the larger listed property funds were trading at very low yields and were therefore able to acquire property at low yields without any dilutionary effect on their earnings.

They are therefore prepared to overpay for properties, making up the shortfall in the long run.

"The effect of this is it is continuing to push (property) yields down," Green said.


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