Listed property sector draws short end of stick

Posted On Thursday, 09 March 2006 02:00 Published by eProp Commercial Property News
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The strong growth in property values has been a mixed blessing for SA's listed property sector, which is struggling to purchase fixed properties, as there seem to be so few sellers.

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The listed property sector has been one of the top-performing asset classes on the JSE in recent years. Eager to keep expanding to continue attracting institutional investors, the sector will have to review its options.

One option touted previously by property pundits was approaching SA's institutional pension funds, which have large fixed property portfolios. The argument is that they should be courted with a view to selling properties in exchange for units.

These large institutions had previously been net sellers of property, particularly when the market performed poorly.

But as the attractiveness of property as an asset class has increased and commercial property values have soared, institutional pension funds are not as keen to sell. Commercial property includes offices, retail and industrial properties.

Pieter Prinsloo, MD of listed property loan stock company Hyprop Investments, says that there has been a slowdown in property transactions between institutions and listed property funds, and that institutions would rather keep properties that are currently performing well than sell them into listed vehicles.

Property funds will now have to look elsewhere, such as to large corporations; government, which is SA's largest property owner; or developing their own properties.

Colin Young, head of asset management at Old Mutual Properties, says fixed property makes up about 4% of the investment portfolios of institutional pension funds.

"This is woefully low in terms of international standards. In the UK, it's 6% and in the US it?s 7%," says Young.

If listed property portfolios are added, the US's 7% increases to 9%-10%, while SA remains under-allocated at 6,5%.

Because of this, local institutional pension funds are trying to increase their exposure to fixed property and will not be looking to sell properties.

Young says that the listed property sector?s options now include approaching big companies and encouraging to them to sell, but this would be a long shot. He says corporations also see the strategic value of holding onto their fixed properties.

For instance, Imperial Holdings indicated in its latest financial results that it would be increasing its property exposure - in the form of showrooms - to about R2,2 billion. Bidvest also indicated that it had a property portfolio of R1 billion.

Young says another option is for property funds to develop properties themselves. This is already a growing trend among the larger listed funds. Another option is to try to acquire properties from government.

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