Kara Michaels hears what Frank Berkeley, managing director of Property Finance at Nedbank Corporate, Norbert Sasse, CEO of Growthpoint Properties, and Erwin Rode, CEO of Rode & Associates, have to say on South African listed property and the international market.
According to Berkeley, South African listed property has grown phenomenally and it is therefore small wonder that the international market is taking an interest. “But why are investors looking here and why now? What do these investors want? Who are the investors likely to be? How much are we expecting of them in terms of education.” The question he also poses is whose job is it to market South Africa Incorporated and to sell that investment?
Says Sasse, “When it comes to the question as to why we should be selling South African listed property, I say why not?”
Further reasons, according to Sasse, are that the world is awash with money and everybody is in search of yield; South Africa is a relatively small, underdeveloped and emerging market; everyone is competing for the same capital; and property, both direct and listed, has become a recognised asset class globally.
“So we need to sell aggressively,” says Sasse.
When it comes to what South Africa is selling, Sasse points out that it is selling a well-developed legal framework; a world-class financial system; transparency in that South Africa was rated 13th out of 56 countries in the 2006 Real Estate Transparency Index compiled by Jones Lang LaSalle; and property performance.
The following tables show South African property performance. Source: International Property Databank (IPD).
According to the IPD, South Africa was the best performing property market in 2005 and the second best performing direct property market in 2006.
South African listed property
Both Berkeley and Sasse point to the phenomenal performance of listed property. “Over the longer term listed property has outperformed other asset classes,” says Sasse.
“Since 2003 phenomenal returns have also come out of direct property.”
Berkeley points out that in terms of recent direct property returns, South Africa is second only to Ireland, “so it’s right up there with great prospects”.
“In addition to fantastic returns, South Africa is selling political stability, economic growth of 4 to 6% and good fiscal discipline,” adds Sasse.
When it comes to how South Africa should be selling listed property, Sasse explains that South African representatives should attend international conferences and roadshows as well as local conferences and roadshows. “South Africa should also be included in relevant international indices,” says Sasse. “It has been included in the IPD for the past 12 to 15 years from a listed perspective, but is still excluded from many of them.
“Also, we should move aggressively toward a formalised Real Estate Investment Trust (REIT) structure as internationally the REIT structure is an accepted ownership structure for property.”
Berkeley explains that South Africa’s listed property investment vehicles include Property Unit Trusts (PUTs), whose market capitalisation on 31 March 2007 amounted to R19,9 billion, and Property Loan Stocks (PLSs), whose market capitalisation on 31 March 2007 amounted to R70,6 billion.
“In North America, market capitalisation in REITs amounted to US $411,1 billion on 31 March 2007, in Europe US $244,2 billion, and in Asia US $175,8 billion,” he says.
“Comparatively speaking we have a small sector, but the reason why people would invest in South Africa is because its growth has been spectacular.
“2002 especially was a spectacular time to buy property. And even though listed property experienced a hiccup in June 2006 when interest rates increased, it is now at record high yields.
“And in 2005 there was a switch and property became more valuable than bond yields.”
When it comes to foreign yields, Berkeley poses the question as to whether South Africa should be in the same range as the rest of the international listed sector? “There’s no reason why we shouldn’t be,” he says. “If you look at Liberty International, the question that comes to the fore is whether the risk is so different in the UK compared to here.” Berkeley explains that there has been a 9% increase per annum in the listed sector. He further explains that the international perception of South Africa has changed dramatically, and that it is no longer perceived as the pariah nation. “Our economy is better run, our tax rate has come down, and newcomers say it’s easy to do business here,” he says.
“We are also experiencing new smaller cycles, which are like hiccups from which we bounce back quite quickly.
“We are effectively now gathering momentum as an economy, which is reflected by our property sector. This calls for growth.”
Berkeley points out that Australia has a much higher proportion of property in its listed sector. “That’s what we need to grow,” he says.
“What we need to do is take property out of private investor hands and put it into listed property vehicles. So to summarise, we have an attractive product but not enough of it, ie we need more supply.”
When it comes to who should be selling South African listed property, Sasse points out that it should be a collective effort. “Organisations and associations like SAPOA, PLSA, APUT, JSE, individual listed property companies, national government, local government and cities and SAREIT should be involved,” he says. “Growthpoint has made three trips to sell itself internationally, and in the last 18 months its foreign shareholding base has risen from 2% to 5%.
“This clearly indicates that foreigners are taking an interest.”
When it comes to whom South African listed property should be sold to, Sasse enumerates global fund managers, emerging market fund managers, private equity investors, private investors and institutional investors as potential targets.
“In conclusion, the question that has to be asked is ‘Do you want foreign investment?’ If the answer is yes, you have to go out and sell it. They won’t come to you,” he says.
According to Rode, there is no point in trying to sell a product aggressively internationally if the product does not meet international world standards. “A prerequisite is critical mass,” he says. “Correct sizing of fund is of pivotal importance before international sale can even be contemplated.
“Besides size is the question of prospective returns. In South Africa prospective returns are outstanding – there are not many countries that can meet it in this regard. The only bugbear is the currency risk that foreigners have to contend with if the rand depreciates.”
Growthpoint is the largest JSE-listed South African property holding and investment company. At 31 May 2007, the nominal value of Growthpoint’s long-term borrowings was R8,2 billion, giving a loan to property value ratio of approximately 40%.
Growthpoint has, over the past six years, grown from R90 million in assets to over R20 billion in assets. The company is approaching its long expressed vision of inclusion in the JSE Alsi Top 40 Index. – Kara Michaels