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Funds with bad habits

Posted On Monday, 05 February 2007 02:00 Published by eProp Commercial Property News
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Listed property fund managers are eagerly preparing to join the globalising trend of property that will bring more capital,greater liquidity and higher prices. But they're ignoring some bad habits that they will have to change before international investors rate them equal to Australian, American or European funds. 
Funds are devouring each other to crack the R15bn-plus market capitalisation that would attract big international investors. Their managers are debating how best to change their property unit trusts and property loan stock companies into real estate investment trusts (Reits) - the format that is understood throughout the world.

Mike FlaxSpearhead was recently taken over by Redefine. Tucked away in the circular to shareholders of Spearhead, at the end of three boring paragraphs on management, is a note that Spearhead CEO Mike Flax is getting a "pre-employment" bonus of 6m shares in Madison, Redefine's asset manager. He became an executive director of Madison after the takeover. The bonus was worth R30m when negotiated and is now worth R45m.

The managers of most funds that invest in the listed property sector, as well as some analysts, missed this item. Stanlib property fund manager Mariette Warner describes it as "unethical" for Flax not to have disclosed the bonus more prominently to shareholders. After all, he told the FM after the takeover announcement last July: "The Redefine/Spearhead deal would never even have been considered if I hadn't been approached by Marc Wainer to join Madison in the first place." (Companies August 4 2006).

"We would have expected better disclosure of what was clearly a conflict of interest," says Catalyst property fund managers' Andre Stadler. "We supported the transaction because it made sense for shareholders. But my concern is for those investors relying on Mike's recommendation not being fully apprised of his conflict."
But Flax is perplexed at the reaction. After all, shareholder value has risen from R30 a Spearhead share to R44 since the takeover. "The sign-on bonus was not for delivering Spearhead to Redefine," he says. "It was part of an employment offer and an attempt by Madison to cement the succession planning with its initial public offering. It was also totally independent of any Spearhead deal being finalised.
"In addition, I was a material shareholder in Spearhead and had that (as my major interest) to cover and negotiate in the Redefine deal. Everybody is very happy with the deal."

External management

Madison has been among the most aggressive devourers of property funds since it launched seven years ago. Last year it thought that one of its funds, Redefine, had agreed a takeover of Paraprop with its managers.

But Rodney Squire-Howe and his colleagues at Spire, Paraprop's contracted external asset manager, didn't want to be part of Madison. So they approached Investec property group (asset managers of Growthpoint) and agreed a takeover deal with them. In the process they issued shares in Paraprop to Growthpoint that diluted Redefine's interest.

Squire and his six colleagues are highly rated as managers, but Paraprop performed poorly for the first two years of its six-year existence because of an unfortunate initial structuring with deferred shares. Despite this, management and Absa - who are also shareholders - sold the management company to IPG for R148m, based on the value of the asset management and property management contracts including transaction fees. That's about 10% of what Growthpoint is paying for Paraprop. So were the executives acting in Paraprop's interests or their own?

Catalyst's Stadler says Reit investors in Australia, America and Europe frown on external management. He says the best model for SA is Australia, where management companies are "stapled" to the listed fund, though they can manage other funds.

Squire-Howe sees R148m as realistic commercial value for the contracts. "We had to fund the company ourselves and devote our total effort to the company for over six years," he says. "We had thought of managing other funds but there was too much potential for conflict." He also feels that at no stage did he act in conflict with Paraprop's shareholders or outside accepted practice in SA. "It's cheaper for a fund to have external management when its market cap is below R2bn," he adds.

Transaction fees

Some fund asset managers - notably those of CBS, Hospitality Group, Paraprop and SA Retail - charge a fee each time a property is bought or sold. This is on top of their asset management fee. Stadler, Investec's Angelique de Rauville and other analysts are opposed to this. The conflict is that the managers might be tempted to increase deal flow, which might not be in the interests of shareholders.  

Last modified on Saturday, 26 April 2014 15:36

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