Where to from here?

Posted On Tuesday, 27 November 2007 02:00 Published by eProp Commercial Property News
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South Africa’s R105bn listed property sector finds itself in somewhat of a catch-22 situation. On the one hand it wants to attract meaningful foreign investment; on the other it hardly has enough scrip to satisfy local demand

Craig HallowesThe sector has already added R100bn to its market cap since 2000 and needs to double in size to start appearing regularly on the radar screens of foreign fund managers. But how do you continue to grow the sector now that commercial property has become such a hot commodity that even institutions that five years ago were still trying to get out of bricks and mortar are again aggressive buyers?

That's one of the key questions raised at the recent IPD/Sapoa property investment conference held in Cape Town. While there's a view that property funds would have to go offshore to bulk up portfolios, there's also a sense that the sector may be missing out on opportunities in its own back yard. Craig Hallowes, CEO of Fortress Asset Managers and an executive director of Diversified Property Fund, says if the listed sector can convince corporates, institutions and Government to securitise some of their directly held properties the sector would be able to double in size in no time. Says Hallowes: "Only 10% to 15% of SA's commercial property stock is currently listed.

Clearly, the sector isn't doing a good enough job to convince owners of direct property to swap their assets for listed units." Angelique de Rauville, CEO of Investec Listed Property Investments, estimates that the JSE's Alsi 40 companies, institutions and Government are collectively sitting on commercial property stock worth at least R200bn. She believes that it doesn't make sense for general equity companies to hold on to buildings when they can earn a higher return on investing capital raised by property sales in their core business.

Paul Theodosiou, MD of listed fund Acucap Properties, says listed funds have massive growth opportunities through "land banking" and "brownfields" development. Big corporates, such as AECI and Tongaat-Hulett, alone own millions of square metres of undeveloped land that could be brought to market. Says Theodosiou: "If the sector could take even 10% of AECI and Tongaat-Hulett's land, we could double in size." Theodosiou says it's time that property stocks move away from the safe, traditional way of doing things and start to include asset classes other than offices, retail and industrial buildings in their portfolios.

Residential property, in particular, seems to offer huge scope for growth, given SA's sizeable housing backlog. To date, less than a handful of SA funds have broadened their asset base to include residential stock, unlike their US, British and Australian counterparts, who have a large exposure to the housing sector.

Rob Wesselo, an executive director at Pangbourne Properties, says the high transactional costs of buying and selling residential property in SA make it expensive for local funds to own housing stock. But Wesselo says there's a huge opportunity for Government to open the sector up to listed funds by further lowering transfer duties. "SA will increasingly go the rental route as it becomes more difficult for the man in the street to buy a house. And listed funds can become a major supplier of rental stock, provided Government addresses the tax issues."


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