Category Archives: Finance

Doing your part to ensure bond approval.

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{Financial institutions are tightening their grip on approval criteria for home loan seekers. What can you do once you’ve used your bond calculator to improve your chances.}

 The amount of accepted applications have fallen lately as a result of tighter lending regulations. These oblige providers to make far more stringent checks that you’ll be able to afford to pay your bond, even if interest rates go up or your circumstances change.

While there’s no way of absolutely guaranteeing your bond application will be approved, there’s plenty you can do to make sure your chances are as high as possible.

The following are some helpful suggestions that should assist you in your home loan seeking endeavours. Remember that a good start in this process is to find out where you stand with the aid of a home loan calculator.

In no particular order of importance…

  1. Grow that nest-egg

Saving a large deposit reduces the lender’s risk if they offer you a bond, as they’ll be providing a loan for a smaller portion of your house’s cost. It also shows that you have the financial discipline required to pay a bond. Remember that when you use your bond repayment calculator, one of the entries is the deposit; you will notice what a difference a large deposit makes to the final monthly repayment. Applying with a higher deposit will improve your chances of being accepted.

  1. Shrink some debt

Lenders can be negatively swayed if you have many debts on top of your bond, like outstanding credit card bills, overdrafts or loans. The more you can pay off before you apply, the better your chances.

That doesn’t mean you should use most of the deposit you’ve saved to pay off debts. Focus on paying off the expensive ones, preferably using money you’ve saved by cutting down your spending on luxuries.

  1. Get your credit record in order

Check your credit record through credit bureaus like Transunion, Credit4life or Compuscan. (There are many more.) These can reveal any potential problems like unpaid loans or bills that warn off lenders.

It also gives you the opportunity to check there’s nothing incorrect on your credit report that would harm your bond application – if you find anything wrong, you can ask for it to be removed.

You’ll then be able to work on making yourself look more attractive to lenders. Avoid applying for many financial products just before you take out your bond, although sensible spending like paying off a credit card in full each month can look good.

  1. Declare all income

When your lender or broker asks about your income, don’t just give your basic salary. Include details of bonuses, commission and any other income like investments, shares, expected inheritances and even potential pension payouts.

Make sure the information you give is accurate, make sure you include all your income. Try to time your application sensibly  – you’re far more likely to be accepted if you have a permanent contract than if you’re still in a probation period of a job you’ve just started.

  1. Reduce your bill load

Having bills you pay out for every month will reduce the total amount of your wages available towards paying your bond.

Divide your monthly expenditure into essentials such as food, travel costs, bills and child maintenance, luxuries such as gym membership, holidays and entertainment. If you can cut down on the latter, you’ll improve your chances of being accepted.

In the event of failure…

When you’re looking for any kind of loan, avoid appearing too desperate. Don’t apply for dozens of bonds in the hope that one might say yes, as every lender will leave a mark on your credit report when they check it.

Instead you should look into why you’ve been turned down. The lenders all have different criteria, so just because one rejects your application  doesn’t mean that all of them would. Your calculations with your bond calculator are still valid.

Ask the bond provider if they can offer any feedback. You can also check your own credit report to look for any potential problems or speak to Bond Brokers like Bond Buster, SA Home Loans or IHBB who may have a clearer idea of why the lender rejected your application.

Can bridging finance help you with your home loan

bridgingCan Bridging Finance Help you with your Home loan?

So you’ve used your bond repayment calculator to establish what you can afford in terms of a purchase price and the necessary repayments. But for some reason you fall short of what you can afford for one of the following reasons. Consider these scenarios and see whether bridging finance is for you.

Transfer Fees – Bond
If a purchaser has been granted a loan by a bank but is short of the transfer and legal fees it is possible in some circumstances, where the bond granted is higher than the debt due, to get an advance on the bond granted, for these costs.

Estate Agents Commission
If the attorney handling a property sale / purchase transaction is prepared to give a Letter of Undertaking to settle the loan to the estate agent for commission advance and the Principle of the agency is prepared to allow the bridging of estate agents commission to take place, then it is possible to arrange a bridging loan on the sale of land or buildings.
Generally the purchaser should have presented guarantees to the attorney and all documents ought to have been signed by all parties regarding the transaction

Pensioners Finance
People older than 65 who own property and wish to access some of the available equity can access up to 40 % of the equity with no need to pay any monthly payments.
Common conditions: The client should reside in the residential property; both partners must be over 65 years of age and agree that the settlement of the loan can be made from the property owner’s estate.

Sellers Proceeds – Bridging
You have sold a property and made a profit and need some of the money now rather than when registration takes place.
Common conditions: As long as the attorney handling the transfer is prepared to sign a Letter of Undertaking that the purchasers have put up guarantees, that all Common conditions have been met and that he will disperse funds to the bridging company on transfer, then it is possible to arrange an advance of this profit; sale proceeds advance.

Credit Rehabilitation
Similar to Debt Consolidation above, but all the debts you have are settled by the lenders on your behalf and your credit bureau listings removed. Property is the main source of the funds in lieu of the debt settlement. If clients do not own a property then the chances are you won’t be able to get assistance.

Additional Bond
A second bond or further bond is one method where the equity of your property can be unlocked and converted to an access facility or to cash.
Common conditions: Client must be able to prove ability to service the loan granted and the value of the property must be higher than the current bond. You can calculate this with a bond calculator.

Debt Consolidation for property owners
This is a 4 month bond – if you have equity in a property a short term loan can often be arranged to settle your debts (from the equity in your property) and then arrange for you to apply for a normal 20 year or 30year bond (don’t forget you can use your bond calculator for this.). This is a debt restructuring program
20 year bond – if you have at least 40 % equity in your property but you are blacklisted at the credit bureau, a 20 year bond could possibly be arranged for you

Bridging for developers
Bridging for developers can be obtained where a property developer has almost completed, or has completed, a property development project and needs to get access to some of the funds due to him from the sale of units built.
There are various ways this can be done and so it is best to speak to a consultant to advise you.

For a rudimentary list of property bridging finance service providers a simple entry into a search engine will do. Shop around the net to see who’s out there and meet with your banks to compare notes.
For those looking for bridging finance in addition to your home loan, remember to use your bond affordability calculator to work out your preliminary repayments and then factor in bond registration costs et cetera. From there you will be able to tell where you stand with regards to your bridging finance requirements. Any challenges you may have encountered with bridging finance in the past consider approaching the FAIS Ombudsman.

Written by Matthew Campaigne-Scott

A Glossary of Terms for the Homebuyer

property-investment-real-estate-trading-word-cloud-illustration-word-collage-concept-35121918When considering a mortgage bond from a bank to buy your dream house you may find yourself bogged down in a swamp of legal terms and bureaucratic mumbo jumbo. Not everything is as straight forward as your bond calculator.

Affordability Score

The Bank’s assessment of a Buyer’s ability to afford monthly instalments based on their income.

Agent’s Commission

The amount payable by the Seller to the agent for work done on marketing and selling a property. This is a percentage of the selling price.

Asking Price

The price at which the Seller is offering their property for sale.

Beetle Certificate

A certificate issued confirming that a structure is free of wood borer or termite infestation. This is a legal requirement when selling.

Bond

A lending agreement between a Buyer and the Bank. The legal bond document states that the Bank will lend an amount of money in the form of a bond.

Bond Calculator

Online software used to calculate estimated repayments on a bond. Input data is required, for example the desired monthly price. The sales price is then automatically adjusted enabling the user to appraise his/her position in the market place.

Bond Cancellation Cost

Costs accrued during the cancellation of a bond. These include an Attorney’s registration fee and a Deeds Office fee.

Cancellation Attorney

The Attorney who attends to the cancellation of the Seller’s bond and is appointed by the Bank with whom the current mortgage bond is held.

Conveyance Tax

A tax charged for the transfer of property from the Seller to the Buyer.

Conveyancer

A Conveyancing Attorney will attend to Deed Office transactions such as the transfer of a property from a Seller to a Buyer.

Cooling Off Period

The 5-day period after the Offer to Purchase has been signed during which the Buyer of a property has the right to cancel this agreement.

Credit Report

A detailed score card of an individual’s credit history prepared by an official credit bureau. This report will determine your risk as a borrower.

Debt-to-Income Ratio

A ratio which shows a Buyer’s monthly payment obligation to debts and which is divided by gross monthly income to ensure affordability.

Estate Agent

The Estate Agent is a person who is authorised to act as an agent for the sale of land or the valuation, management, or lease of property.

FICA

The Financial Intelligence Centre Act, 2001 was formed to regulate money laundering and requires valid information to be presented to the Bank.

Home Loan

An agreement between the Buyer and a Bank, where the Bank lends the Buyer money in order to purchase property.

Home owners Insurance

An insurance policy that covers your house (structure and property) in the event of damage or loss.

Instalment Amount

The monthly amount paid to the lender as part of the total home loan amount. Instalments run for the entire duration of the agreed term.

Interest Rate

A percentage interest is added onto the amount of money borrowed from a Bank. This amount is fixed for a period and is based on the amount of money borrowed.

Mortgage Broker

Someone who acts as an intermediary between the Buyer and a Bank, for the purposes of arranging a home loan.

Municipal Rates

Taxes paid to the municipality by property owners.

Net Income

This is your yearly income after taxes.

Occupational Rent

A charge applied to the Seller for occupying the property after registration has taken place or to the Buyer for occupying the property before the registration has taken place.

Offer to Purchase

A legally binding document signed by the Buyer and Seller stating the agreement of the sale and its conditions.

Payslip

A document issued on a monthly basis by your employer as proof of your monthly income.

Property Transfer

When ownership of a property legally changes hands from Seller to Buyer, through registration of the property at the Deeds Office.

Purchase Price

The amount paid for the purchase of a property as set out in the Offer to Purchase agreement. This can be worked out retroactively by using a bond calculator.

Qualified Buyer

Someone who meets a Bank’s requirements of affordability and has qualified for a home loan.

Registering Attorney

The Attorney who attends to the registration of the new bond into the name of the Buyer.

Repayment Term

The number of months allocated to pay off a home loan. The maximum repayment term is 30 years. This can be easily calculated with a bond calculator.

Sectional Title

An entire property of flats or townhouses. The property is divided into individual units and sold separately and runs under a Body Corporate.

Subject to Sale

When a sale of a house becomes binding and unconditional then certain conditions are met, such as bond approval.

Title Deed

The legal document which states ownership of a property. The Title Deed is filed at the Deeds Office and contains details of the property.

Utilities

Services provided by the government for your use at home. Utilities include: water, electricity, telephone service and other essentials.

Voetstoots

Refers to a property sold “as is”. After a sale of property, a Seller is not liable for defects following a reasonable inspection of the property.

Print this list out and keep it handy when those terms start flying around that you’re not too familiar with. Remember to refer to your bond calculator as the figures start coming at you. With both your bond calculator and your glossary of terms you’re all set to go house hunting.

property-investment-real-estate-trading-word-cloud-illustration-word-collage-concept-35121918.jpgproperty-investment-real-estate-trading-word-cloud-illustration-word-collage-concept-35121918

Bond Affordabilty and the Hoops Banks make us jump through

Your Bond Affordability ‘Score’Picture

Is there such a thing? With research it seems that between the banks the variables are many and the absolutes are few. After working out what you can afford with your bond calculator one will have to take your chances depending very much on the bank.

ABSA Home loans singled out ‘Affordability’ as having become a key factor in the South African housing market recently. You may know what you can afford having used a bond calculator to work out what asking price you can afford but the banks have varying, between banks, criteria on which to base its decision to grant you a bond.

Affordability is a key factor in the South African housing market and banks’ lending criteria has tightened up, but in some instances applicants are reportedly still able to qualify for 100 per cent loans.

ABSA has been quoted in a previous review that the focus of demand for supply of housing is set to be on smaller-sized and higher density housing because affordability is set to remain a key factor into the future.

ABSA also said it still lends up to 100 per cent home loans to would-be home buyers even in this buyers’ market but only if they qualify.

In line with the National Credit Act, the bank’s lending criterion is informed by the customer’s affordability and credit worthiness and taking into consideration some factors as discussed below.

Bond Assessment Criteria

When a local property website asked the four major banks what the criteria are for assessing a home loan application the summarised replies were:

Standard Bank: a loan–to-value criterion plays a major role in what the customer can qualify for; documents required depend on whether the applicant is employed or self-employed, has a Standard Bank transactional relationship or not and if they earn a fixed or variable income.

Generally, document requirements are less onerous for customers that have a transaction account i.e. Employed SBSA applicant with fixed income would need to provide the latest payslip and an offer to purchase.

A non Standard Bank customer with fixed income would need to provide the latest payslip together with the latest three months consecutive bank statement reflecting three months’ salary deposits.

Nedbank:  minimum income (single or joint gross monthly income) + R2500- minimum loan amount R100 000. A maximum repayment term of 25 years. An acceptable credit record. Payment by debit order. The property must be in good condition and acceptable to the bank

FNB:  latest copy of applicant’s payslip. A bank statement. Self-employed applicants will need to supply a signed personal statement of assets and liabilities as well as a balance sheet and financial statement for the business from which income is derived. A commission earner will be required to submit the last six months commission earnings statement.

ABSA:  Current debt repayment behaviour; credit history; affordability; net disposable income; household finances; residential property cycle and prospects; prevailing economic cycle; consumer risk profile.

Preapproval of Bonds

When asked if the bank would give pre-approval of a bond with no upfront fees: this could be worked out and adjusted using a bond calculator.

Standard Bank: A customer can apply for a pledge via the internet or through the Standard Bank Call Centre. No fees are charged for pre-approvals.

Nedbank: Does not grant pre-approvals. Customers can read through the information on the bank’s website to determine what they can afford through various calculations and thereafter use a bond calculator.

FNB: It is called a “Passport to Purchase” where no upfront fees are levied and this pre-qualification is valid for 90 days.

ABSA: According to the National Credit Act, financial services providers are prohibited from granting pre-approved finance to customers.

Sceptics may reflect that this is hardly a scientific process but at the end of the day banks are conservative for a reason. What’s best, is to ensure you have jumped through all the necessary bureaucratic hoops with the bank of your choice and ensure you are taking advantage of a bond calculator to keep the correct figures at hand.

 

 

Pre-Approved Bonds

So what is a pre-approved bond when it’s at home in front of the fire warming itself? OnePicture web definition says that a “pre approved bond gives both the buyer and seller the assurance that the buyer can afford offers made within a certain price brand, and that they will qualify for the bond required to make the offer.” So let’s unpack that some more.

How It Works

When you use a bond calculator it’s reassuring to know what to compare figures to, what to feel comfortable about investing into the selling price field. Getting yourself a pre-approved bond is the very first thing you should do before you put in an Offer to Purchase.

The National Credit Act stipulates that monthly deductions, like monthly living expenses, income tax and debt need to be considered. It is recommended that you provide your bank or home finance professional with a precise summary of your monthly expenditure and your level of debt so your pre-approved figure can be established. Your bank or home finance professional will formulate your pre-approval figure and issue you with a certificate. This enables you to provide an estate agent with a pre-approval certificate that has been calculated according to the National Credit Act requirements.

The pre-approval is valid for 90 days after which your bank or home finance professional should contact you to check whether your expenses have changed over this period. (It’s better not to wait to be contacted but rather contact them a few days in advance.) If there has been a quantifiable change, the pre- approval will be revalidated and recalculated. If there is no quantifiable change to either income or expenditure, your bank or home finance professional will reissue a revalidated certificate. This ensures that your input data for the bond calculator is always accurate.

After the banks have assessed your home loan application, and if the application is successful, the bank will issue a Quotation which will include interest rate, cost of credit, any special conditions that may apply, etc. Your bank or home finance professional will discuss this and other bank quotations with you. Once you settle on a Quotation, your bank or home finance professional  will proceed to instruct the attorney appointed to register the mortgage bond.

Advantages of having a pre-approved bond

It can be so frustrating for a seller to accept an offer only to find out weeks down the line that the deal has fallen through due to the buyers inability to get a home loan. It can also be very disappointing for the buyer. With a preapproved bond this can be avoided. Using a bond calculator you can determine what you aspire your preapproved bond to be.

Bear in mind when dealing with sellers and Estate agents that they want to sell to you! You are holding the cards when it comes to buying and you will seek out the very best deal available to you. This attitude will make the seller think twice before counter offering and will have the Estate agent working twice as hard to close the sale.

One should be encouraged to be assertive when making an offer, apply for bond pre-approval before you go out on a show day.

The posture of the Estate agents, like anyone who is dependent on financial institutions giving credit to customers in order for them to earn an income, is very different towards a pre-approved buyer, especially one who has clearly gone to the trouble of doing the necessary homework with a bond calculator.

The agent knows that you are looking for a home and that you essentially have the money available. This is a huge bonus for the agent who will go out of his way to help you spend your money.

The other thing the agent will be very aware of is that you don’t have to spend your money with him/her but there will be other agents out there trying to help you spend it. The result is that once you have made an offer he will do everything in his power to get the seller to accept your offer.

Currently we are living in a buyers market with some areas selling homes for as much as 30% below their asking price. Both the agent and the seller know this, the pressure is on the seller to accept what he knows is an approved buyer when you walk in..

Good luck with pursuing your preapproved bond
.

Ten practices of picky property purchasers

So you want to buy a house. House hunting is all about the viewing. Here’s how to make sure a property is really worth your money.Picture

Upon determining your bond repayments with your bond calculator it’s time to start looking around. Looking around a property that could become your new home is exciting, but you can’t afford to get swept up in fantasy, sales pitch and the pressure to purchase…

Failure to use the viewing time effectively and you could miss something that ends up costing you dearly.

Here are ten tips that will help you see what’s really up for sale behind the agent’s sales talk.

1 View during the day

Make sure to view the property at least once in daylight so that you can see it with clarity. If your first viewing was unavoidably at night, push for another viewing in daylight before making an offer. Similarly if you have viewed the property during the day and want a better idea of what the area is like in the evening, you could arrange a second viewing later in the day.

This will give you an idea of how light the property is at different times of the day, how loud the neighbours are and what the neighbourhood is like once evening sets in.

2 View with company

The more pairs of eyes you have looking around a property the better.

If you attend a viewing alone then it’s likely you will be lead around by an agent who do their best to highlight the positive features of the property, not giving you the chance to look closely.

So even if you will be living alone, take a friend or relative to view the property with you as they may spot something you miss.

3 Examine the exterior.

It is easy to get caught up examining the inside of a property and forget to take a thorough look at the outside.

Checking the exterior and the roof as well as the pipes and drainage is essential; if there are any problems they could be expensive to fix.

If any work needs doing you may either want to arrange a professional survey if you are looking to buy, or look for a rental property elsewhere.

4 Take your time

The last thing you want is to have to rush around the property because you have another appointment or viewing booked.

You should leave at least 20-30 minutes to view the inside of a property and a further 20-30 minutes to check the outside and the local neighbourhood.

If you are being shown around by an agent or the owner, try and view the property at your own pace and avoid being rushed through.

 

5 Consider room and space

An empty flat or house will always look bigger than a fully furnished property, so you need to check that there really is enough room.

Check what the property offers in terms of storage space. For instance, are there built in wardrobes in the bedrooms, or would you need to have space for a wardrobe in each room?

Would your bed, couch, dining table and drawers all fit comfortably or would you be blocking plugs and windows and so on?

In the kitchen, are the white goods built in or would you need to use vital space for a fridge, washing machine or dishwasher? What about the cupboard space, is it expansive enough to fit all of your pots, pans and crockery?

6 Arrange many viewings

Making sure you go back to view a property after the first look can help make sure that you don’t miss any potential issues and ensures that your know exactly what you’re getting for your money.

It also gives you the chance to ask the agent or owner any specific questions that you have after looking around the first time and to negotiate on price if needs be.

7 Take pictures

Taking lots of photos, or even a video, is a great way of ensuring that should you miss something you then have a personal record of the viewing to look back at.

It also means that you can look back at the property and compare it to others you’ve seen in your own time without the pressure of going around with a letting or estate agent.

However, make sure to ask permission before you start snapping away. Although letting agents and estate agents will not usually have an issue with you taking photos, if the owner still lives in the property it is only polite to check.

8 Watch out for damp

Damp can be serious concern regardless of whether you are looking to buy or rent a property, simply because it may illustrate more fundamental problems.

Signs of damp include a musty smell, peeling wallpaper or bubbling paint and mould or dark residue on the walls and ceiling.

If you suspect that the property suffers from damp it need not be a deal breaker but should definitely be an issue you raise with the agent and investigate further.

Any cracks or signs of subsidence may indicate a much more serious problem with the property so make sure you look out for these too.

 

9 Examine everything

When you are looking around a flat or house, don’t be afraid to test the fittings and fixtures.

Check that the windows open easily and that there is suitable water pressure throughout the property by testing the showers and taps. You are also within your rights to check things like the level of loft insulation, the wiring and electrics during a viewing and it’s a good idea to do so.

Although you may feel awkward testing things in this way, any issues you spot at viewing can either be fixed before you move in or be used to negotiate a reduction in price.

10 Ask the hard questions

Don’t be afraid to ask questions, whether you are looking to rent or buy, you will be parting with a significant sum of money and you are well within your rights to have any of your questions answered. For example ask about rates, previous renovations, traffic, neighbours, burglaries, state of roof, proximity of schools, state of geyser, the reason why the property is on the market, were there tenants before and so on.

Negotiating a Better Price for Your New Home

Here are four important considerations when negotiating the asking price of your prospective home so you can bring down the monthly repayments you calculated with your bond calculator.Picture

Probably the biggest purchase you’re likely to make is a house. So bringing down the asking price even a couple of per cent will save you thousands of Rands.

Here are our 4 easy methods of negotiating down the price of the property you have your eye on.

  1. Start low

It may be that you have to put in an offer on the property before you get any reaction from the seller.

If this is the case put in an offer below what you worked out using your bond calculator, this will then allow you to up your offer at a later date which will then seem more attractive to the seller.

It’s also wise to explain your offer; state exactly what work the house needs and how much it will cost, or that other properties of a higher standard went for less than the listed price nearby.

Explaining your offer in this way not only makes the seller think twice about their valuation but also makes you appear serious about purchasing the property by showing that you haven’t simply plucked a number out of mid air.

2.View thoroughly

In reality you can often tell quite quickly if you like a property or whether you don’t ever want to set foot in the house again. However, if you are interested you shouldn’t get swept away with the excitement of finding somewhere you’d want to live.

Any flaws or work that need doing represent an opportunity to knock some money off your offer price. So taking the time to thoroughly inspect the property, inside and out, could give you the ammunition you need to negotiate.

Estimate the cost of any work required and take this amount off your offer price – you’ll be justified in doing so.

You should also find out whether there are likely to be any major expenses in the near future – ask when the geyser was last serviced and when the roof was last repaired (or resurfaced if it’s flat). Again, if work is likely to be needed in the near future you have a legitimate reason to go in with a lower price.

You should also consider whether parts of the property need redecorating and how much this might cost and factor this into your negotiations.

  1. Ask for extras

If the person selling the house isn’t willing to budge on price then you may want to negotiate over the additional costs you face when buying.

It’s estimated that the cost of actually purchasing a house can easily exceed £5,000 when you consider legal fees, valuations fees and surveys.

Asking that the seller contribute towards these fees could be a good way to cut the cost of purchasing the property and save hundreds or possibly thousands of Rands – even if you don’t manage a reduction in that actual house price.

  1. Do your research

You’ve already done some research by using your bond calculator, now consider researching the  ‘going rate’ for other properties in the same area.

If you can argue that the asking price is above what similar properties sold for nearby, you will have a strong case for a reduction in price.

You should also check the asking price of other properties currently on the market and see what they offer in terms of space, features and presentation.

  • If other properties are of a similar standard but the asking price is higher, then the owners of the property you’re looking at could be struggling, or in a hurry to sell – both of which could work in your favour when negotiating over the price.
  • If other properties are of a higher standard but going for an equal or lower price you need to question whether they’d be a better investment than the one you’re currently looking at.
  • If other properties are of a similar standard but are on the market for less than the property you want to buy, you can use this to your negotiating advantage.

If you think the property is overpriced mention it to the estate agent – they may feed this back to the owners who could drop the price of their own accord.

Ask the agent how many viewings the property has had and whether it’s received any previous offers. If there hasn’t been a great deal of interest, it gives you licence to go in with a lower bid when you start negotiating.

If you discover that the property has had lots of viewings but no offers then quiz the estate agent about why they think this is the case and use this knowledge to your advantage.

You could also ask for certain things, such as curtains and appliances to be left by the current owners to reduce your set up costs even further.

After you’ve gone to the trouble of using a bond calculator to work out your monthly repayments that price you can afford, then you’ve shown intent and are ready to negotiate. Be strong and don’t back down – remember you’re the customer and you hold most of the cards. Don’t be afraid to consider the points above when proceeding with your house purchase enquiries.

BOND PROTECTION INSURANCE

So you’ve decided to work out the dePicturetails of your bond repayments with our bond calculator. But now you need to start thinking about, what they call in the industry, Bond Protection Insurance.

Bond Protection Insurance is a bond insurance plan that has been specifically designed to provide flexible risk benefits in respect of home loan protection.

The plan pays the original bond in the event of Death, Dread Disease or Permanent Disability, and pays the monthly bond instalments in the event of illness, injury, temporary disability and retrenchment. Under most plans the bond holder has the flexibility to select any combination of the benefits, in addition to the death benefit.

Most insurers these days offer choices, making the cover more accessible, highlighting the convenience and expertise they offer. Getting insured should be a straight forward process ensuring that your particular financial needs are adequately met and that your most important asset is protected for Life.

This is all very well but what about the details. Once you’ve used your bond calculator and you have some idea of the kind of house you’re in the market for and what the repayments you’ll be  faced with, bond protection insurance is like another hill before the end of the marathon. So let’s look at what insurers are offering.

What are the benefits?

Firstly there is the direct payment of benefits into your home loan. Next there is the death benefit (which typically pays a lump sum directly to the home loan within 48 hours of receiving all the documentation on a valid claim). There is also an instalment protection benefit which covers the bond instalment in the event of illness, injury, temporary and permanent disability.

There is usually a permanent disability benefit which pays a lump sum directly to the home loan in the event of a valid disability claim as well as a dread disease benefit which pays a lump sum directly to the home loan in the event of a valid dread disease claim allowing you to focus on getting better. A retrenchment benefit is offered which covers the bond instalment for up to 6 months while you focus on finding new employment.

Very rarely are there medicals or HIV test. Two lives may be insured under one policy, thereby providing a more affordable premium. The policy can be ceded to any financial institution. The policy will pay the full death benefit on death even if the instalment protector benefit has been claimed. While a valid Instalment protection benefit is being claimed, all the policy premiums due during that period do not have to be paid. You should be able to increase or decrease your cover to suit your home loan requirements.

Free death cover is offered, usually around three months,  while the bond registration is pending. Cover is provided for the term of your home loan.

Typical Features of the Products

Instalment Protector Benefit

If you as a homeowner are prevented, as a result of illness or bodily injury, from earning an income for a period of usually 90 days or more, your bond protection plan Insurance will pay the monthly home loan instalments while you are unable to work. These would be the same instalments you that can be worked out with a bond calculator.

Dread Disease benefit

Most Bond protection policies include what’s called a Dread Disease Benefit. A list of diseases would be included with the policy. If you are diagnosed with any disease on that list you will be paid the sum assured, usually after a period of 90 days, allowing you to concentrate on recovery. If the sum assured is greater than the outstanding home loan balance, the difference will also be paid into the home loan account.

The following 12 Dread Diseases are more often than not covered by most insurance companies:

Blindness, Cancer, Coma, Coronary Artery Bypass Graft, Heart Attack, Heart Valve Surgery, Loss of Limb, Major Burns, Major Organ Transplant, Paralysis, Renal Failure, Stroke.

Retrenchment Benefit

If a homeowner is retrenched for a period longer than 30 days, Bond Protection Insurance will, if this benefit is included, pay the home loan instalments for up to 6 months, allowing the homeowner the peace of mind to find alternative employment.

Lump Sum Disability Benefit

Almost all bond protection insurance covers homeowners who are totally and or permanently disabled rendering them incapable of earning income for a period of 90 days or more. Bond Protection Insurance will pay the home loan instalments for the first 24 months, before paying the lump sum benefit equal to the sum assured into the home loan account. If the Sum Assured is greater than the outstanding home loan balance, the difference will be paid into the home loan account.

Death Benefit

In the event of death all Bond Protection Insurance schemes pay a benefit equal to the sum assured. Again, if the Sum Assured is greater than the outstanding home loan balance, the difference will also be paid into the home loan account.

Now that you’ve seen all the benefits of Bond Protection Insurance you can soberly consider the value in pursuing this next stage in your journey to purchase your own home.

Investing in Africa, Good News, Bad News and Faux Pas

As people around the globe eye Africa for potential investment and South Africans head north there is some encouraging news to feed those ambitions, worrying reports to temper our enthusiasm and some mistakes to learn from.
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Ghana’s capital Accra is awash with educated, well-dressed young up-and-coming people, driving top-of-the-range cars living in stylish houses. It’s indicative of Ghana’s economic growth, 4% last year. According to the World Bank many African economies are among the world’s fastest growing in 2015. African countries in the top 20 last year with the highest projected compounded annual growth rate (CAGR) from 2013 through 2015, based on the World Bank’s estimates are: Zambia 7.2%, Tanzania 7.4%, Uganda 3.4%, Sierra Leone 9.5%, DRC 7.9%, Ghana 8.1%, Mozambique 8.7%, Angola 8%, Rwanda 7.8%, Gambia 7.8% and Ethiopia 7.9%.

US-based business consulting company Ernst & Young reports: “There is a story emerging out of Africa: a story of growth, progress, potential and profitability.”  Back in 2013 US secretary of state for African affairs, Johnnie Carson is quoted as saying that Africa represents the next global economic growth since 2000, U.S. trade relations with Africa have been dictated by the Africa Growth and Opportunity Act (AGOA). As a unilateral preference scheme of the U.S. to promote trade and investment in Africa, AGOA was meant to boost U.S. trade with Africa and the development of the continent. However, 14 years in, U.S. trade in goods with Africa has demonstrated a perplexing downward trend since 2011. U.S.-Africa trade dwindled from $125 billion in 2011 to $99 billion in 2012 and $85 billion in 2013. For the first five months of 2014, U.S.-Africa trade in goods totalled about $31 billion. At this rate, the total trade volume in 2014 could be well below $80 billion in a continuation of the declining trend. This is largely blamed on an decline in demand for oil from Africa and the fall-out from the 2008 financial crisis

In comparison, Beijing has been quite low-key in disseminating its Africa trade promotion efforts, although its trade with Africa has been growing exponentially. China surpassed the U.S. as Africa’s largest trading partner in 2009. China-Africa trade reached $166 billion in 2011, an 83 percent rise from 2009. The bilateral trade further increased another 19.3 percent to $198 billion in 2012, and passed the $200 billion threshold to $210 billion in 2013. In terms of trade volume, Chinese trade with Africa not only dwarfs U.S. trade with Africa, but the gap is as large as 2.5 times the magnitude of last year. But there’s some dissonance between the rhetoric and action.   {THE HILL}

London based magazine The Economist reported: “Since The Economist regrettably labelled Africa ‘the hopeless continent’ a decade ago, a profound change has taken hold.” Today “the sun shines bright … the continent’s impressive growth looks likely to continue.”

Africa’s trade with the rest of the globe has skyrocketed by more than 200% and annual inflation has averaged only 8%. Foreign debt has dropped by 25% and foreign direct investment (FDI) grew by 27% in 2011 alone and 13% in 2013. Although according to E&Y FDI projects (as opposed to cash) declined by 3% in 2013

Despite projections for growth in 2015 being revised downward due to the so called Arab Spring, lack of demand for oil and a sluggish world economy , Africa’s economy is expected  to expand by 4.2%, according to a UN report earlier in the year. The International Monetary Fund (IMF) is expecting Sub-Saharan African economies to increase at above 4.5%. Added to that, there are currently more than half a billion mobile phone users in Africa, while improving skills and increasing literacy are attributed to a 3% growth in productivity.

According to a UN report the think tank,  McKinsey Global Institute writes, “The rate of return on foreign investment is higher in Africa than in any other developing region.”

An end to numerous military conflicts, the availability of abundant natural resources and economic reforms have promoted a better business climate and helped propel  Africa’s economic growth.  Greater political stability is greasing the continent’s economic engine. The UN Economic Commission for Africa (ECA) in 2005 linked democracy to economic growth. Having said this attacks by Boko Haram in Nigeria and Al Shabab in Somalia and Kenya go against this trend and have worrying consequences if not contained. Also in this category would be the so-called  Xenophobic violence in South Africa.

All this growth and urbanisation is putting a strain on social services in cities, it has also led to an increase in urban consumers. More than 40% of Africa’s population now lives in cities, and by 2030 Africa’s top 18 cities will have a combined spending power of $1.3 trillion. The Wall Street Journal reports that Africa’s middle class, currently estimated at 60 million, will reach 100 million by the end of 2015.

Some other sobering news:  “A sustained slowdown in advanced countries will dampen demand for Africa’s exports,” writes Christine Lagarde, managing director of the IMF. Europe accounts for more than half of Africa’s external trade. Tourism has been and may continue to suffer as fewer Europeans come to Africa, affecting tourist dependent economies like Kenya, Tanzania and Egypt.

The South African Reserve bank warned in May that the financial crisis in Europe, which consumes 25% of South Africa’s exports, poses large risks. Adverse effects on South Africa could have severe consequences for neighbouring economies.

Another worry is the resurgence of political crises. Due to the so called Arab Spring, economic growth in North Africa plummeted to just 0.5% in 2011 and hasn’t recovered much since. Recent coups in Mali and Guinea-Bissau could have wider economic repercussions. “Mali was scoring very well, now we are back to square one,” says Mthuli Ncube, the AfDB’s chief economist. Ethiopia, Kenya, Uganda and other countries have militarily engaged in Somalia, which may slow their economies.

A cause for concern what many are referring to as Africa’s “jobless recovery.” Investors are concentrating on the extractive sector, specifically gold and diamonds, as well as oil, which generates fewer employment opportunities. 60% of Africa’s unemployed are aged 15 to 24 and about half are women. In May, UNDP raised an alarm over food insecurity in sub-Saharan Africa, a quarter of whose 860 million people are undernourished.

But none of this is deterring South African business interest north of the border. One may ask why? South Africa’s domestic market is not providing local companies with enough growth opportunities, prompting many of them to look at the rest of the continent. This according to Ernst & Young’s Africa Business Centre’s leader, Michael Lalor in an online press conference recently: “While South Africa was still growing well compared to the advanced economies, it’s certainly hasn’t kept up with some of the other rapid-growth markets.” Says Lalor. Now it’s battling to grow at all.

Analysts are pointing out that many of the other emerging markets, such as China and South America, are difficult to enter, making the rest of Africa the obvious choice. Asia is seen as almost excessively competitive. Latin America ventures mean dealing with a very strong and ever present Brazil. Therefore Africa, given its sustainable growth story and its potential, is an obvious region for South African companies to grow into.

Quoted by howemadeitinafica.com Lalor says that most Johannesburg Stock Exchange-listed companies are currently developing strategies for the rest of the continent.   Ernst & Young is experiencing strong interest from foreign companies to invest in the continent. “The response from our clients and from potential investors is overwhelmingly positive, to the extent that we simply cannot keep up. So there’s no doubt that we are seeing significant interest, both spoken, interest in spirit, but also people putting their money where their mouths are,” he said.

These sentiments are confirmed by a survey done last year by Price Waterhouse Coopers. A CEO survey published by PwC found that 94% of South African company heads expect their business in Africa to grow in the next 12 months. PwC interviewed 32 South African CEOs in the ICT, financial services, and consumer and industrial products and services industries.

With this in mind it’s worth turning to Raymond Booyse, founder of consultancy firm Expand into Africa, who identified four mistakes often made by South African companies venturing into the rest of the continent.

The first was: Not doing your homework. South African firms are frequently not prepared to spend money on market research. “Go and look if there is a market for your products or services. After you’ve established that there is indeed a market, find out who your competitors will be,” says Booyse.

Booyse points out that South African companies underestimate transport costs and ignore how local laws and regulations influence doing business.

Secondly: Ignorance. Many South African business people are ignorant of local cultures and attitudes according to Booyse. By way of example, ignorance doesn’t realise that just because they’re both former Portuguese colonies, what works in Angola’s capital Luanda, doesn’t necessarily mean it will work in the northern Mozambique. In a recent report, research firm Nielsen noted that African consumers’ attitudes towards technology, fashion and how to spend leisure time vary greatly. No prizes for that one.

Thirdly: Arrogance. Booyse says that South Africans sometimes think they know what people in the rest of the continent need. “In the rest of Africa, South Africans are often regarded as arrogant.”

Finally: Not being prepared for the high costs of doing business in Africa. Many South African companies are not aware of the high costs involved in doing business in the rest of the continent. “If you want to spend two weeks in Angola it will cost you R40,000 (US$4,700),” notes Booyse. “It is not cheap and easy.” Flights for example, from South Africa to either Kinshasa or Lubumbashi can be costly, and hotel rates are also very high.

It’s clear that Africa is a fertile place to plant seed. But Africa is not for the faint-hearted as business is done in a very different way to elsewhere in the world, with all manner of social and political hoops to jump through. South African companies have a potentially bright future and definite advantages if they are prepared to take risks, stay humble and do their homework.

For more articles by Matthew Campaigne-Scott CLICK HERE

Offshore Property Investment – Not for the Faint-hearted.

OFFSHORE-INVESTINGTiming is everything, and if it isn’t then learning from history is. Continuing to make the same offshore property investment bungles could be the result of a combination of emotional frustration, Afro-pessimism and a Moby Dick like obsession with the Rand.

In 1997 the South African government allowed its citizens to take R200 000 per capita per annum to invest offshore. One may argue that investors practically ran to the offshore hills from an outperformed JSE and evaporating Rand.  South African investors stood clutching their modest handful of Rands and looked up in wonder at a booming Wall Street. By 2001 the rand had fallen to R13.50 to the Dollar.

Who would believe that ten years later many countries would be on the verge of bankruptcy and that people would be grumbling about the “Strong Rand” and that the South African Equity market had outperformed most other markets over the same period?

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But those in this game for the long haul will remind us that when all seems lost, it’s time to role up the  sleeves and capitalise. Back in 2001 when fear gripped investors it was actually the right time to buy into SA equities. When the rand collapsed and afropessimism crept in, investors bought Dollars and Euros expensively and sold out of arguably undervalued markets and bought into markets trading at large premiums.

Looking back over ten years, comparisons have been made to a R100 investment in the JSE all-share index at the end of 2001 that would have been worth about R400 by the end of June this year, versus only around R94 if invested in the MSCI world index over the same period. The main US equity index, the S&P500, is today still roughly 10% below its peak in 2000 in rand terms.  Emotions have been the main driver of the investments.

Says Investec Asset Management director Jeremy Gardiner  to the Financial Mail August 2011, Many SA investors, having watched with horror over the past 10 years as the rand doubled in value and the JSE delivered enormous returns, are again considering switching at the wrong time — this time out of developed markets and into SA equities and the rand. “Yet again, this decision is made on the basis of emotional frustration rather than recognising that both SA equities and the rand are now relatively overvalued.”

But a steady hand is required here since the strong performance of the SA equity market seems set to continue.  Offshore investment in general equities may well have dried up recently, it seems the JSE’s R125bn listed property sector is becoming a hot commodity among overseas investors. Big institutions putting down their names include Principle Global Investors, Black Rock and State Street.

On the receiving end GrowthPoint properties, has seen its overseas shareholding jump from 3% to 11% a while back. Redefine – SA’s second-biggest listed property counter, with a market cap of R20.3bn – doubled its offshore shareholding from 4% to 8% in the same period. “Global investors are now taking note of the fact South African-listed property offers far more attractive returns – total returns of close to 30% last year – than other global real estate markets.” Says Growthpoint executive director Estienne de Klerk.

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There is expectation of more overseas funds showing up locally over the next 12 months. Names bandied about include Hyprop Investments,  as well as what we’ve see materialise from the merger between Capital Property Fund and Pangbourne Properties, also whatever surfaces from the potential merger between Acucap Properties  and Sycom Property Fund and then there’s the  listing of Old Mutual’s R12bn property portfolio.

Macquarie First South Securities property analyst Leon Allison spoke to Finance Week recently and said that although returns over the next decade will be more subdued than has been the case over the past 10 years, current positive structural changes will make the sector more investor-friendly.

Bringing us back to offshore options. The rand’s ‘strength’ favours taking money offshore. But the logic for offshore investment goes beyond any potential weakening of the rand. There is much to be said for the need for South Africans to diversify their assets. But there are more South Africans who have in the past got their offshore investment timing wrong. 2001 was the prime example, when a historic devaluing of the rand alarmed investors into the arms of foreign markets. At the peak of the rush, the second quarter 2001, 88% of net unit trust inflows went into offshore funds.

Now according to Marius Fenwick, head of the financial services arm of accountants Mazars:  “Now is the opportune time to invest offshore as the strength of the rand makes offshore investment attractive. Instead, offshore diversification should be used to hedge future rand depreciation and diversify through access to large global companies.” So here we go again…

But we know already this isn’t all about the rand. The great Bismark said: “Some people learn from their mistakes, that’s good. But isn’t it better to learn from other people’s mistakes?” Aren’t the underperforming overseas markets just waiting for South African investors? Rand or no Rand variance?offshore-investing

What are the options? Who are the players in offshore property investment?

First of all there’s Growthpoint that bought up a Sydney listed subsidiary applying its winning formula in Australia. Then there’s Emira, which has just put R117m into Growthpoint Australia, in their case they claim the rand had zero to do with their investment move. Emira has a 6.4% stake in Growthpoint’s Australian presence.

International Property Solutions markets UK and Australian residential property to South African investors. CEO Scott Picken was quoted as saying that South Africans wait until the rand is collapsing, panic and throw their money into offshore apartments as it hits bottom, he says. “Most investors have lost money offshore in this decade.”

Financial correspondent Scott Picken writes that comparative data shows that South Africans would have made much more money over 10 years measured in sterling by buying an average house in Johannesburg in 1997 than buying one in London at the same time. Only time will tell if the shoe is now on the other foot.

Other off shore institutional investors include Capital Shopping Centres. British Capital, run through Barnard Jacobs Mellet and Stanlib which has offshore unit trusts. Investec Property Investments has unlisted funds buying property in Europe and the US. There is also Catalyst which has an unlisted fund of global listed property funds.  Redefine is working through its London-listed Redefine International. Resilient has New Europe Property Investments (Nepi), which mainly owns shopping centres in Romania. All top performers.

Other choices in property include these very few funds which have actually lost money. Nedgroup Global Cautious (down 8,5%); Sanlam Investment Management Global Best Ideas (down 2,3%) a long term performer though; the Absa International fund of funds (down 15,8%)

Whether it’s  a strong Rand or the need to diversify one’s portfolio, these may be the times that offshore property funds offer the South African investor a long term strategy again, last made available ten years ago. Whatever the case this isn’t the time to think with the knee-jerk of emotion or a political bias.

Who’s Going to Wear the Green Tights?

Gateway Hotel - Umhlanga

Gateway Hotel – Umhlanga

Have you ever witnessed one of those moments at a glittering event, where the company envoy ostentatiously hands over the enormous polystyrene dummy cheque to the suitably grateful charity representative. The cameras flash, the recipient’s knees bend a little, the company boss swells and flashes a self-satisfied smile. People clap and everyone swoons in awe at the selfless generosity of business. Onlookers declare: “They do have a heart.” And “It’s not just about the money.” Let’s not pretend that business doesn’t need positive affirmation from the community. Face it; we all like a good pat on the back.
Which brings up a growing trend in the world that has found its feet in South Africa. Green Buildings. If ever there was a way of scoring points with the community, government and those with not only green fingers but whose superhero sports green underwear – the environmentalist, this is it.  IF you’re a land lord don’t knock it, because something’s in it for you.
Recently this was demonstrated in the latest extension to that Mecca of upmarket shopping, Sandton City. A splendid dome graces the new Protea Court. This crowning expansion, involves interior refurbishments and 30,000sqm of new retail space. The Protea Court roof has been created with a product called Texlon, which is made up of multiple layers of foil known as ethylene-tetra-fluoro-ethylene (ETFE) it’s so green it could be mistaken for peas.
“Texlon is an innovative technology used worldwide but has been used for the first time in South Africa at Sandton City,” affirms architect Tia Kanakakis from MDS Architecture. “It was selected as a suitable roofing material as it is lightweight and an environmentally-friendly climatic envelope”.
Kanakakis pointed out excitedly: “The ETFE material is unique in that it does not degrade under ultraviolet light or atmospheric pollution.” The material doesn’t harden yellow or deteriorate. Furthermore, as the surface is very smooth and has anti-adhesive properties, the envelope self-cleanses in rain.” For Sandton City this means going Green and they are being richly rewarded already. Sandton City Manager Sharon Swain was able to announce the arrival of international names like Dumond, Inglot, Carlo Pignatelli, Miguel Vieira and Kurt Geiger to the centre.

Nedbank Ridgeside Durban

Nedbank Ridgeside Durban

Of course Green buildings aren’t new. Twenty-one years ago two initiatives were launched which were foundational to  establishing the concept of energy-efficient buildings and green building: BRE (British Research Establishment) released BREEAM, and BREEAM became the basis for a host of other rating tools including LEED in the US and the much talked about Green Star in Australia.
What about the landlord cost/tenant benefit scenario?  Investor’s landlords may well ask what’s in it them, surely more of a good old pat on the back? The Australian Financial Review explored the importance of green-star ratings, which basically determine how Green a building is, in attracting tenants to buildings. When looking for leasing locations tenants are now demanding at least a four star rating. In Australian cities the demand for the now-coveted green buildings is driving up costs in refurbishing and retrofitting older buildings. Greener adds value and demands higher rents.
According to property investment analysts IPD, Green Star buildings are outperforming non-rated buildings on a financial basis by a significant margin.
Here in South Africa,  Llewellyn van Wyk, Editor at Large for Green Building South Africa writes: “Ultimately I believe green building is in the national interest, and should be an issue driven by Government: for this reason, I strongly supported the establishment of a Part X “Environmental Sustainability” to the South African National Building Regulations and look forward to it being populated with the full range of deep green building imperatives in due course.”

Responsible-Building-Design

The world-class, high-tech design of the Durban ICC building itself incorporates green elements such as large glass facades for natural lighting, reducing the need for artificial lighting, and energy saving escalators which only activate when stepped on. In addition, the Centre utilises energy-efficient air-conditioning systems which build up ice overnight, which is used to cool the building the following day. Indigenous landscaping is a feature of the Durban ICC, with the majority of plants local to Kwazulu-Natal, limiting the reliance on irrigation. The Durban ICC’s water use profile is low for a building of its size. The installation of sensor taps in the bathrooms prevents water waste and even its toilets have been converted to a more efficient water usage system.

In the US the Green standard is held up by LEED, which has not been without its squabbles:  Henry Gifford has made his living designing mechanical systems for energy-efficient buildings in New York City. And he admits the (LEED) program has popularized the idea of green building: “LEED has probably contributed more to the current popularity of green buildings in the public’s eye than anything else. It is such a valuable selling point that it is featured prominently in advertisements for buildings that achieve it. LEED-certified buildings make headlines, attract tenants and command higher prices.”
 

By means of counter point Ben Ikenson reports on the current controversy embroiling LEED and hence whole Green Building bureaucracy in the US:”But for years, Gifford has been a tenacious and vocal opponent of LEED, claiming that the program’s “big return on investment’ is more a matter of faith than fact, and that LEED simply “fills the need for a big lie to the public.” Last October, Gifford filed a class-action lawsuit for more than $100 million against the USGBC, accusing the non-profit of making false claims about how much energy LEED-certified buildings actually save and using its claims to advance a monopoly in the market that robs legitimate experts — such as himself — of jobs. We may ask ourselves if we need this in South Africa.
Back to the benefits, conventional wisdom has it that not only does the environment benefit from the carefully considered construction that goes with Green building, but that people are generally happier and more content working or living in Greener buildings. Comments Dr Suzan Oelofse, IWMSA Central Branch Chairman, “The environmental benefits derived from green buildings can further be enhanced by including waste minimisation and recycling principles in this type of environment.”
Further to this, Oelofse believes that Green buildings should be orientated in such a way as to reduce the heat load and to optimise shade and thereby enabling the use of more energy efficient lighting systems and air conditioning.  This makes economic sense in the light of on-going increasing Eskom electricity costs and it makes sound economic and environmental sense to use renewable resources and to become as energy efficient as possible.
It seems the devil may be in the bureaucracy and that making buildings greener may require state rather than private regulation if the LEED struggles are anything to go by. But there are clearly many practical and financial benefits to Greening up the workplace. Besides there’s nothing quite like that warm approval that comes from cosying up to a superhero or heroine in green tights.

Backleasing, Backsliding, Boom or Bust

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Cell C, South Africa’s third Cellular operator is now a tenant in 960 towers that they used to own! Huh? It’s true, it’s called a sale-leaseback or backleasing and that’s an investment that may interest you.

American Tower Corporation purchased, through its South African subsidiary Helios, 329 more telecommunications towers from Cell C for R965 million bringing the total to 960. American Tower will is  acquiring up to 1,800 additional towers currently under construction..

Cell C is now an anchor tenant on each of the towers purchased, and its relationship with American Tower is  enabling it to further enhance the quality and coverage of its cellular network.

So what exactly is a sale-leaseback when it’s at home in front of the fire? A sale leaseback option allows a company to sell its assets and lease them back simultaneously. This can be beneficial for businesses that are in need of an inflow of capital.

This practice isn’t new at all. In France it’s been popular for over thirty years. In other Western economies it’s widespread and its trends generally flow from the US.

Originally, sale and leaseback transactions were only applied to tangible assets, such as property, plant, machinery and equipment. However, since the mid–1990’s, its application has increasingly been extended to incorporeal property, including trademarks, patents, designs, copyright and know-how. When applied to intellectual property, the leaseback and associated rental payments are more correctly referred to as licence and royalties, respectively. But we’ll focus on leasebacks in property in this article.

download (3)Looking at world trends first: sale-leaseback’s in the US were at their highest in 2007 when $16.1 billion in sale-leaseback properties traded hands. Transactions have increased over the past 18 months. After hitting a low of $3.7 billion in 2009, nearly $4 billion in sales closed last year and another $2.6 billion had occurred this year so far.

In the US a set of rules was set up to guide such transactions by the Financial Accounting Standards Board in 2003. Crafted after the Enron disaster to force most off-balance-sheet financing back onto the books, these rules are expected to encourage many companies to convert, once popular, but now discredited, “synthetic leases” by which companies maintained control of the property while gaining tax benefits,  into more legitimate “true leases,” such as sale-leasebacks and net-leases.

Companies mainly used synthetic leases as a way to keep real estate debt off the balance sheet while reaping all the other benefits of owning real estate. (A synthetic lease is when the money to finance the asset is borrowed, and the lender takes a security interest against the asset, but has no further recourse against the borrower / operating company.)

There are instances in which prioritising the use of an asset is more important than wanting to own it. Usually in these situations liquidating assets would bring business operations to a standstill as the use of the asset is integral to the functionality of the enterprise.

Unlike a traditional mortgage, which often finances 70% to 80% of the property value, a sale-leaseback allows a company to get 100% of the value from the real estate.

Sale-Leasebacks can be constructed flexibly providing options to both seller and investor. Some examples would include offering a Joint Venture type involvement allowing the seller to share in a certain predetermined percentage capital growth gain in value, or structure buy-back options on certain pre-determined conditions. Investors can also provide themselves with certain down side protection.

Within this context one ought to consider the net-lease too, whereby a company finances a new location by finding third parties to buy the property and then leasing it from them. There is a surge in such transactions currently in Western Economies. It has been opinioned that this is partly because companies with weak credit ratings are finding it hard to get conventional financing and are increasingly turning to real estate as a source of cash.

However it has to be said that even solid companies with strong credit ratings are looking for ways to raise cash to retire debt and improve their financial ratios.  In fact, many of the biggest names in business — including Microsoft, and Wal-Mart have used leaseback over the years.images (7)

Bri-Anne Powell, investment consultant for Pam Golding Commercial in Gauteng is reported as saying “There are investors in the marketplace who have an appetite to purchase sale and leaseback properties, preferably industrial in nature, in visible, strategic locations. In terms of industrial property the areas of the Durban South, East Rand, Midrand and Centurion are favoured, and in regard to very large industrial properties it is preferred that these would comprise a main warehouse or factory which would be located near OR Tambo International Airport.”

Sale-leasebacks ought not to be a prospect for an investor who isn’t going to cope with the potential struggles of owning commercial real estate or an investee who can’t afford to loose his asset. If a company that’s leasing a property goes bankrupt, the court may not uphold the lease. So the’ buyer beware’!

The recipe to being a lucrative investor in sale-leasebacks is not just appropriate decision-making but to make use of one’s asset to maximum effect.  For the purchasing party to a sale-leaseback, they have acquired a property with potential for growth and a long term income flow from the lease. On the sale side of the transaction there is the liquidation of an unwanted or superfluous asset whilst retaining long term use of the same through a lease agreement.

Life Rights, are Reverse Bonds an Alternative?

images (2)Making up for lost time during the Second World War, many soldiers returning home to Europe, North America and the colonies establishing families, the children of which are embarking on their retirement years round about now. Unfortunately this collective has been described as largely asset rich and cash poor.

Given that most people retire later than expected, still working long after retirement age, and having not planned adequately for their sunset years, choosing where to live is arguably the next biggest decision in the retirement process. Faced with the prospect of selling one’s property with the view to purchasing a retirement home, there are some options to consider.

Broadly speaking the options are Life Rights, share block, freehold or sectional title. The latter three are thoroughly marketed and explored. But ignorance regarding Life Rights continues.

Life Rights is the most widely used retirement home model worldwide. Life Rights offers the lowest purchase price relative to product. The fact that there is neither transfer duty nor tax payable is an attractive boon.

download (1)It is important to be appraised of the following facts:

The purchaser does not have ownership of the unit. The ownership of the unit is retained by the development/complex and is not transferred to the individual as with sectional title. The purchaser has a right to live in the unit for the remainder of his or her life. In essence it’s like paying a lifetime of rental in advance. (This usually extends to a spouse or life partner upon the death of the other.) The unit though may not be bequeathed.

When the remaining party dies or chooses to leave the unit they or their estate are paid on the basis that the capital sum paid is returned plus 25% of the profit after costs. The percentage will differ from one development scheme to another and the amount or percentage is usually linked to the period of occupancy.

An additional benefit of entering into a life right scheme is that accommodation costs remain fairly stable, especially if the development offers a fixed for life levy.
images (1)Which bring us to Reverse Bonds or Reverse Mortgages.
It has been suggested by Rob Lawrence of Rawson Finance that some senior citizen consider a Reverse Mortgage. A Reverse Mortgage may be the answer to some who have paid up properties and no or little income to either maintain the properties or provide for themselves. The Reverse Mortgage is a loan paid in a lump sum, or monthly, to a recipient by the bank, against the security of a mortgage bond. No bond repayments are required and the funds advance can be used to purchase a pension or any other asset that can increase income. Alternatively, the proceeds themselves can be paid out as an income.

A reverse mortgage is an arrangement with some of the rules reversed while maintaining the basic principle of a mortgage. It’s still a loan secured by your real estate, but you don’t have any deadlines on payments as long as you live in your home or on your property. With a reverse mortgage, you basically convert the value or the equity of your home into cash.

Although Common in the USA, UK and Australia for many years, there are only two institutions currently that will offer this facility in South Africa: Nedbank and Senior Finance.
Some conditions usually include: 1) the bank, not an independent evaluator, will value the property, 2) the percentage bond advanced on the value of the property is dependent on the purchaser’s age, 3) the mortgagee has to be over 65 years old, and 4) any change in the ownership of the property automatically makes the sum advanced fully repayable.

cartoonLooking at the downside: What if the value of the loan plus interest exceeds the value of the property by the end of the loan period. This means that the borrower or his/her estate may need to sell assets in addition to the house to pay off the loan.

Upon the death of the borrower the surviving spouse may have to repay the debt, which could result in the need to sell the house in the process. A reverse mortgage could undermine your intention to leave an inheritance for your children and others, instead leaving a legacy of debt.

Conventional wisdom would have it that it’s risky business to borrow money to fund living expenses where the interest rate is linked to the prime rate.

The Reverse Mortgage is really aimed at the asset-rich/income-poor senior citizen who isn’t planning to live for decades and decades. A 65 year old taking out a loan and living to 85 has accumulated twenty years of debt plus interest. That’s quite a legacy.

After having spent ones whole life making monthly payments to this or that and worrying about debts perhaps living out ones retirement years under the obligation to ‘keep it short’ or pay up just may make Life Rights seem a lot more attractive.

Visit the Waterfall Community Retirement and Eldercare Page.

Airport Offices, Conference and Meeting Places – what to expect

 

Fraport's the Squaire mixed-use development

With the advent of the aerotropolis many business people are expressing an interest in office and conference accommodation at airports. Terms bandied about include serviced offices, turnkey premises and virtual office. But how close to the airport can you get?

As it turns out pretty close, but often with no cigar. When searching across the globe for serviced office accommodation at airports the directories, internet or otherwise are all smoke and mirrors. A cursory scan of office space at airports on Google or Yahoo gives you blatant statements like “Serviced Office at Heathrow” or “Turnkey facilities at O R Tambo.” With further investigation you discover that there is a helpful little map with direction on how to get to the said facilities from the airport – not in the airport!

images (1)So don’t be deceived you may not be able to pick up your luggage and push it to your office at the airport. What you can do is take a short taxi or shuttle ride to one of numerous facilities offered close to airports. Of course this isn’t new by any means but the prevalence of ‘designer’ type offices specialising in accommodating ‘on-the-hop’ business people who want to slip in and out to have a meeting with clients in meeting facilities or a conference room, is on the increase.

Having said that there are many airports that do offer virtual offices in the actual airport. Schiphol Airport, Europe’s 4th busiest, is located in Amsterdam. For $130 a month you can have the key to a very basic but functioning office with electricity, shared ablutions, Wi-Fi and a desk.  These seem to be typical.

download (1)So why are serviced office facilities necessary? Minimal capital outlay: In the serviced office, you have the choice of bringing your own furniture and office equipment or renting these items from your landlord. According to serviced office providers, the cost of using a serviced office, with or without conference facilities, is approximately 40 to 50 per cent of the cost of setting up and staffing a comparable conventional office. In a Virtual office you bring nothing at all, just your key and WiFi is mandatory.

So what is a Turnkey or Virtual operation? When you rent a serviced office, you don’t have to waste your time designing an office, installing electric and phone lines, recruiting staff, and taking care of all those other details. With a turnkey you make one call today and have a fully functioning office tomorrow.

The difference with these facilities at an aerotropolis is that your facilities are designed for ease of use from the airport and the airport is seen as the centre of the universe with all its tentacles slipping seamlessly out from it into the world around it. Again there is nothing new in this as hotels and conference facilities have been sidling up to airports for years. But the relationship has now become somewhat symbiotic.

Looking more at the conference facilities in particular most hotels either point you to facilities adjacent to or within close proximity to the airport. Like offices most advertised facilities for airport conference rooms are actually not at the airport itself, in fact the advertisements on the internet are particularly misleading in this regard.

imagesWhere there are conference facilities and meeting rooms at airports, the model, if there is one, is one of outsourcing. Looking at South Africa as an example: The O R Tambo International Airport has the Intercontinental Sun running upmarket and fully serviced conference and meeting facilities. Boasting seven boardrooms and two conference rooms, facilities cater for between 10 and 100 delegates and can accommodate up to 140 guests for cocktail functions in the private Savuti Restaurant.

Looking abroad, Munich Airport has the Kempinski Airport Hotel located at the centre of the airport beside the terminals. The Munich Airport Academy and training centre specialises in conference facilities and meeting places for business people right beside the airport.

The two above examples seem typical of many airports that seem to have handed over the conference model to the professionals

Airport Meeting Places is big business. There are organisations like Alliance Virtual offices. This international network offers both turnkey facilities and meeting rooms for across the globe. Many of these in airports. Typically these networks’ facilities offer:download

  • Wi-Fi Internet: Most locations will offer wireless internet access for free, or for a minimal charge.
  • They promise “Friendly welcome”: All venues are staffed by a professional team who will be ready and waiting to receive you and your guests. Many venues will also offer additional receptionist support such as administrative services.
  • Presentation facilities: Most meeting room venues will have presentation facilities on offer such as screens, projectors, wide-screen monitors and whiteboards.
  • Video conferencing: Many venues now have video or audio conferencing capabilities, perfect for long-distance meetings with remote teams or board members.

Airports and aerotropolis business culture is more than ever focused on the world of networking and connecting people using facilities that are both hospitable and convenient. The important thing is if you really want to meet at an airport make sure the facilities you require are actually at the airport.

The Price of Converting to REITs

Many listed property companies are converting or considering converting to real estate investment trusts (REITs) in South Africa since the April 1st new tax regime for list REITs was enacted. Other countries have gone down this road and one may ask as to how their share prices fared as a result of such action.

 

U.S.-listed real-estate investment trusts, or REITs, are on track to issue more new equity in the U.S. than in any year since 2001, according to Ipreo, a capital-markets data and advisory firm. REITs have raised $16.8 billion in U.S. IPOs and secondary stock sales so far in 2013, a pace that would top 2012’s record $36.6 billion.

 

During the last couple of years, REITs, aided by investors’ rabid appetite for income-producing investments, consistently have trumped the broad market. In 2011, while the S&P 500 was flat, the FTSE Nareit U.S. index jumped 4.3%. Last year the S&P was up 3.8%; the REIT index, 5.9%. No wonder, then, that companies in industries including digital-transmission towers, data warehouses, private prisons, and health-care facilities are seeking to convert to REIT status. And there are attractive opportunities to play this trend through the shares of companies likely to undergo a conversion.

 

In the US, for example, and much of the world follows the lead, a company seeking to become a REIT must satisfy two main criteria: It must derive at least 75% of its revenue from rents and other direct real-estate activities, and it must pay out at least 90% of its profits to shareholders as dividends. In return, those profits are untaxed at the company level, and the hope is that yield-focused investors will flock to the shares.

 

One of the most prominent conversions last year was American Tower, the leading owner of mobile-communication transmission towers, which moved to become a REIT soon after it had used up its tax-loss assets. The switch, effective last Dec. 31, immediately made American Tower the second-biggest publicly traded REIT. Its current market value is $26 billion. The stock gained 14.7% in 2011’s second half, after it started the conversion process, and last year added another 8%.

 

Now, American Tower’s smaller rival, SBA Communications (SBAC), is setting the stage for a conversion, already reporting adjusted funds from operations, or AFFO, as REITs do, alongside its usual operating-company results.

 

According to REIT commentators Online Barrons, Jeff Kolitch, portfolio manager at the Baron Real Estate Fund (BREFX), says that the average REIT fetches 22 times AFFO, a measure comparable to operating cash flow. At a recent price of around $50, SBA was trading at about 17 times this year’s forecast operating cash flow. At 22 times, the stock would be around $66.

 

Datacentre REITs are currently performing well and are popular among investors who are attracted by their high dividend pay-outs as well as by growing demand for datacentre real estate. The strength of the sector could push other datacentre companies to go public or adopt the REIT format. One example of this is Equinox, a company operating datacentres for the likes of AT&T and Amazon.

 

The following three datacentre REITs are good examples of REIT switching success stories;

 

• CoreSite Realty (COR), with market capitalization of $580 million, is most similar to CONE. COR is the smallest datacentre REIT, but its stock value has increased 33% since the end of October, and its dividend yield measures 3.6%.

 

• Digital Realty Trust (DLR) is the largest of the three data centre REITs with market capitalization of about $8.4 billion. Its stock value increased more than 16% since the end of October, and its dividend yield is 4.1%.

 

• DuPont Fabros Technology (DFT), with market capitalization of $1.5 billion, is the second largest data centre REIT. Its stock value grew 14.8% since the end of October, and its dividend yield measures 3.3%.

 

Finally Corrections Corp. of America converted to a REIT and is the nation’s largest operator of private prisons. The company operates 66 correctional and detention facilities, and has a total capacity of about 91,000 beds, yes, that’s real estate, in 20 states.

 

Correction Corp.’s funds from operations (FFO) per share, a key REIT cash flow metric, grew 7% to $2.34 in 2012 from $2.19 a year earlier. Corrections Corp. has provided guidance for a 16% rise in 2013 FFO per share to between $2.72 and $2.87. Some of this growth will likely come from a one-time tax benefit of between $115 million and $135 million from converting to a REIT. Corrections Corp. plans to pay quarterly dividends at an annualized per-share rate of $2.04 to $2.16 this year. At the mid-point of this range, shares yield almost 2%. In addition, the company will pay a special one-time dividend of at least $650 million to investors during 2013. The special dividend will be a combination of cash and stock.

 

The lofty valuations that REITs now command in the US might not be sustainable over the longer term, especially if interest rates rise, offering good alternative income investments. And the requirement that 90% of earnings be paid out to shareholders means earnings can’t be accumulated for future investment, necessitating that still-growing REITs sell equity or debt to buy or build additional properties. REIT conversions could boomerang down the road. But at the moment, the haste to be a part of the REIT club holds rewards for discerning investors.

REITS: Internal Verses External Property Managment.

They’re like non-identical twins, opposite sides of the same coin – internal and external management of REITs seems to be very much a case of “what you lose on the swings you gain on the round-abouts.’

Generally, REITs are either internally managed, with management as employees of the  REIT/operating partnership, or “externally managed” pursuant to a management contract with no direct  employees. Usually, private REITs and registered-but-not-traded REITs are externally managed for a fee by a related party manager. The related party fees for these types of vehicles can be significant and will vary based on the underlying investment premise and effort involved (e.g., “core” investment portfolio strategies typically have lower fee arrangements than those of more “opportunistic” vehicles).

In a REIT with an internal management structure, the REIT’s own officers and employees manage the portfolio of assets. A REIT with an external management structure usually resembles a private equity style arrangement, in which the external manager receives a flat fee and an incentive fee for managing the REIT’s portfolio of assets. The debate over which management method is preferential is favouring the internal management model. The controversy has centred on which method of management produces higher returns for investors, with some arguing that conflicts of interest underpinning compensation arrangements for external managers create incentives not necessarily in the best interest of the shareholders. Internalising management has emerged as the conventional wisdom for removing any conflict of interest between management and investors.

An external manager will typically receive a flat fee and an incentive fee. Generally, the flat fee is based on the asset value under management, which gives the manager incentive to purchase assets, while the incentive fee is based on the returns from the sale of assets. Most incentive fees for external managers are structured with a high water mark. Therefore, external managers will receive incentive fees only when the net asset value of a REIT increases above its highest historical net asset value.

External structures can create governance risks (at least when compared to REITs that are internally managed) and these governance risks can translate into credit risks. The central governance risk is that the external manager uses its control to extract value from the REIT to the detriment of shareholders and bondholders.

Curiously, data is not supportive of the thesis that internally managed vehicles outperform externally managed vehicles, despite popular opinion to the contrary. The potential for conflicts of interest are still greatest in externally managed vehicles and thus will continue to be actively debated. Ensuring maximum alignment of interests between investors and managers seems to be the key to regaining investor trust and support for externally managed REITS.

Having said that the following benefits for external management have emerged:

  • An external manager has larger scale than the individual REIT, so it can provide services at a more economical cost than managing the REIT internally.
  • With regards to management succession, externally managed REITs have a broader set of employees from which to select senior executives, thereby broadening the skills and experiences available to the REIT.
  • When external manager service agreements are specific and outline strict performance criteria, boards of REITs are better placed to oversee the manager’s performance. (Source: Moody’s)

On the other hand the external manager uses his/her influence over the REIT to further his/her own interests over those of the REIT’s shareholders or bondholders; external management representation on boards limits the board’s capacity to independently oversee the external manager and there are few, if any, independent control structures.

As South Africa is still feeling its way into the REITs market it may be worth our while examining what the trends are internationally: The US has typically internally managed, with a few externally managed REITs. External managers are often controlled by owner managers and may manage multiple and related REITs. In the United States, most REITs have now adopted the structure of internal management.

Australia seems to value both internally and externally managed REITs however a large portion of REITs have transitioned to internal management structures over the last few years.

Canada has some externally managed REITs but most are internal as are European, Hong Kong and Singapore.

Good governance is essential for the continuing success of the REIT, as the market places a premium on this attribute. The market needs to be made aware of the REIT’s commitment towards a strong corporate governance mandate.

Clearly the advantages and disadvantages speak for themselves and there’s no doubt that internal management is the favoured option around the world. South Africa is already following that trend it seems as emerging REITs are internally managed.

Green Leases – All You Need To Know

images (4)The mention of something called a green lease may conjure up something by a sea-sick lawyer or scribbled on elephant dung paper. But it is far more practical than it may sound to some who still have the idea of green being about separating the garbage or wearing daisies in strategic places. Green leases are here to stay and it’s likely if you have a foot in commercial property in South Africa that you’re going to need to know what one is.

Crudely a green lease would include obligations on the landlord and tenant to achieve targets for energy consumption and sustainability, among others.

At a residential level green leases would encourage landlords and tenants to agree to work together to make a home greener. The property owner typically commits to manage the rental in a sustainable way while the tenant pledges to reduce energy consumption, to recycle whenever possible and to follow other green lease terms.

green-leaseIn the world of big buildings and commercial interests such discussions can leave one quite discombobulated. As serious as these matters are, in order to understand the necessity of green leases we need to extricate ourselves from some of the genuine earnestness and angst with which the subject is typically approached.

No better place to do so than the good old land of Oz. No worries mate! Well it’s true, despite the rumblings for things to go green in the construction world in the US and Europe for many years, it was the practical Aussies who have played such a pioneering role in the world of green building and thence the accompanying lease framework.

The essential motive for the bringing about green leases in Australia was its federal government’s resolution not to inhabit structures that did not make a 4.5 star NABERS (not the soap opera) rating. NABERS is the operational rating system for carbon emissions in Australia. South Africa is in the process of developing a similar system. More recent legislation relating to mandatory disclosure has further strengthened the Australian regulatory framework and has had a positive impact on green leasing. The carbon emissions legislation in the UK has played a similar role in framing green leases.

Since the Australians have been down this road before, let’s consider what has typically been present in their green leases. According to Commercial Property firm Cousins Business Lawyers, experts in green leases, indicate the following ingredients in Australian green leases:

  • A commitment on the part of the landlord to maintain the central services of the building to such standards to ensure the Australian Building Greenhouse Rating is retained.
  • An obligation on both parties to consider “in a reasonable and co-operative manner” whether an improved rating can be achieved during the term of the lease and, if they agree, to take whatever steps lie within their control to achieve that rating.
  • Both parties to commit to an energy management plan to operate the building in accordance with prevailing government policy on energy conservation.

green-lease1Over in the UK there are increasingly stringent building regulations requiring developers to build more energy efficient buildings and Green Leases may be being used as a device to attract “Green Tenants”.  It is anticipated that in the EU and UK in the future, property owners will be under pressure to improve the energy performance of their buildings as a result of the introduction of Energy Performance Certificates (EPCs) for commercial premises and Green Leases may have a key role in enabling the implementation of the recommendations that will form part of EPCs. The commercial property industry is trying to anticipate legislative pressure that may manifest itself in the same way as it has done in Australia.

Here in South Africa, just last year, The Green Building Council and SAPOA (South African Property Owners Association) put their heads together and rather helpfully released a “Green Lease Toolkit” similar to the UK version and those used in some US cities. The Toolkit aims to facilitate a smoother path than some of the pioneers in this field have experienced thus far. In the Toolkit are some contemplative thoughts like:

“Green buildings present a textbook example of economic game theory. Each party stands to gain if the other acts, but loses if they act and the other doesn’t. The challenge is in negotiating an agreement where both parties act for green buildings to achieve an optimal equilibrium – a ‘win-win’. An informed tenant may be willing to pay a higher base rental if the costs and efficiencies of occupation are improved, so that the joint gain needed to stimulate investment into green development, can be achieved.” PG17 Green Lease Toolkit.

images (1)The Green Building Council and SAPOA’s document make the point that mutual understanding is what underpins any green lease.  They believe the primary purpose of the lease is to a) improve the operational performance of green buildings and b) deliver to landlords and tenants an “equitable share of the incremental value provided by green buildings.”

Finally the toolkit, which has a wealth of information and opinion from South Africa’s leaders in the field, States that a Green Lease seeks to achieve its goals through the governing of:

  • The base building and fit-out quality in buildings
  • The contractual requirements of facilities managers
  • The behaviour of tenants from an environmental perspective
  • Regulation of governing bodies (through continuing education)

Clearly conceptualising of the practical elements as well as articulating the more abstract notions has come together in a very sober yet encouraging document that behooves potential tenants and landlords to seriously consider the work of those who have gone before, as well as follow the advice of men and women who have laid a foundation on which others may build.

images

Whilst the aims of green leases are admirable enough, the provisions that impose obligations on the parties may have some unforeseen consequences:

•      For tenants, the cost implications of the green provisions may only become apparent some way into the lease.

  • For landlords, the level of rent on review may be lower if the green provisions are deemed to be onerous on the tenant.
  • As these provisions are largely unknown and untested in this South Africa, the uncertainty surrounding them may make green leases more difficult to sell on.

Regardless of one’s opinion of matters green it’s clear that green is the future and green has benefits. One thing is certain; if you’re going to get a green lease drawn up make sure you use someone with green fingers, that is someone who knows all about the new strides in green leases.

Private Prison REITs Released

xlarge_chinopenPrivate prisons are big business and two big players with facilities in South Africa, US, Australia and the UK have just undergone REIT conversions. Corrections Corporation of America (CXW) and GEO Group (GEO) each received favourable Private Letter Rulings from the IRS and began operating under REIT rules.

By reducing their corporate tax liability, improving their access to capital and lowering the cost of capital the REIT structure provides more opportunities for these companies which are capital intensive by nature.

South Africa

thumbTo zoom in on a South African example: MMSP( Mangaung Maximum Security Private Prison),was the first of two South African Private Prisons and  the brainchild of the first Post-Apartheid Minister of Correctional Services, Dr. Sipo Mzimela, who, upon taking office in 1996, was appalled by South African Prison conditions, up to 300% overcrowded, and a seething hotbed of corruption.   In such conditions reformation is impossible. The GEO Group promised and by all reports delivered, more humane conditions.

The South African government signed two 25-year concessions for maximum security prisons in Bloemfontein and Louis Trichardt (Makhado) as part of its Department of Public Works’ Asset Procurement and Operating Partnership Systems (APOPS) in 2000. The two winning consortia were responsible for designing, building, financing, operating and transferring the prisons. The facilities hold about 3,000 inmates each and were fully operational in 2002 at a cost of about $245 million (Bloemfontein) and $259 million (Louis Trichardt), respectively. The Geo Group now manage these.

The prison gets 60% of its revenue from company-owned or leased real estate.

The Geo Group is the second largest of the two big players in the US. It has a current market capitalization of $2.5 billion and/or manages 100 correctional, detention, and community re-entry centres with 73,000 beds across the US, Australia, South Africa, and the UK. (The prison gets 60% of its revenue from company-owned or leased real estate.) The company estimates $45 to $50 million in annual tax savings from its REIT conversion. In January, GEO raised its quarterly dividend from $0.20 in 2012 to $0.50 a share, resulting in an implied yield of 5.6%. Shares of GEO have more than doubled (+105%) during the past twelve months.

Biggest Operator

imagesThe bigger name on the block is  one of the largest prison operators in the United States. CXW’s current market capitalization is $3.8 billion. The company operates 67 facilities and owns or controls 51 facilities in 20 states with a total capacity of about 92,500 beds. CXW’s REIT conversion greatly reduced corporate tax obligations. The company increased its quarterly dividend from $0.20 in 2012 to $0.53 after the conversion, resulting in a 5.5% implied dividend yield. Shares of CXW climbed 47% between March 2012 and March 2013, at least in part due to the REIT conversion.

No Shortage of Prisoners

Private prison facilities have increased their percentage of all prisoners growing steadily over the past few years, increasing from 7.9% in 2010 to 8.2% in 2011. Currently 10% per cent of total prison capacity in the US is operated under contract with private companies such as CXW and GEO. The remaining 90% of total prison capacity is operated by state and federal government. In light of government budget constraints, both federal and state governments have increasingly turned to private prisons. With only a few companies in the private sector and high barriers to entry, private prisons face limited competition.

Unaffected during a recession

The private prison industry is largely unaffected during a recession. States/countries may release some prisoners early to control costs, but overcrowding means demand is unlikely to fall significantly. According to a 2008 study by the Pew Centre, the US incarcerates more of its citizens than any other country and people are staying in prison longer, underscoring strong demand for facilities.

Controversy

2347746278It’s worth noting that some of these facilities are controversial because their profit motive encourages incarceration. In contracts to operate state prisons, CXW requested a minimum guaranteed occupancy rate of 90%, which did not go over well with many public interest groups. Private prisons achieve profit margins by controlling costs and spending less for personnel than their public counterparts, which raises the issue of the quality of staffing at these privately-run facilities. By way of example CXW now faces a staffing scandal in its Boise, Idaho, facility where 4,800 hours of supposed work time were falsified. That’s a direct violation of its contract with the state, and an internal and external investigation is underway. We’ll see how it plays out.

REIT conversion for CXW and Geo Group has unequivocally improved their financial positions and contribute to sharp growth in their stock values during the past year. Although prisons are relatively immune to the negative impacts of a recession, inmate populations generally accelerate when economic growth resumes and governments have more to spend on incarcerations. With the recession behind us, demand for these REITs should improve.

Catalyst Focuses on Real Estate in East Africa

Paul Kavuma

East African Chief of Actis Paul Kavuma

Catalyst Principal Partners, the Kenyan based private equity firm is surveying the real estate opportunities across East Africa, where consumer demand is growing and the knock-on effect is being felt from recent oil and gas discoveries.

Another force to be reckoned with in East Africa would be the emerging markets focused Actis. The East African Chief of Actis Paul Kavuma left in 2009 to form Catalyst, taking a wealth of experience with him.

Paul Kavuma told the Catalyst Web News Room: “We have a strong pipeline of deals and are at advanced stages of completing a number of new investments which will be announced by the end of the year,”

In Kenya, Catalyst Principal Partners has started making investments from a broad $125 million fund and from a partnership dedicated to real estate.

The World Bank’s International Finance Corporation, accounts for about 70 per cent of cash raised for the first fund, and the rest came from individuals, insurance firms, fund of funds and others. The firm may approach the market to raise a second fund in the next two years.

Catalysts original investments were in Tanzania. It seems that some of the most attractive opportunities were outside Kenya, the region’s biggest economy. So far in 2013 Catalyst plans are focusing 35 per cent of the first fund on industries such as building materials and cement, technology and financial services.

Catalyst has set up a partnership with Acre Solutions, an international property developer. Together they have identified real estate projects. Investors are being sought. The partnership is also working on a mixed commercial, residential and hospitality development in Kenya requiring about $2 billion in investment over 10 years. Real estate investment trusts (REITs) are planned for the future.

Middle income homes, among other housing in east Africa has surpassed supply for nearly twenty years, and the sector has outperformed other asset classes such as fixed income and stocks. Catalyst, among similarly focused entities, expects the region’s already booming consumer demand and growing economies to get a further shot in the arm from oil and gas finds.

Reported in the Catalyst website newsroom:  CEO Paul Kavuma says, “capital has been raised from leading international and regional institutions and from credible regional high net worth private investors, with the quality of investors in being reflective of the attractive fundaments of the region and is a positive signal of the growing confidence in the economic prospects for East Africa”.

South African Self Storrage – Ripe for a REIT?

Self Storage

Self Storage

There are REITs (real estate investment trust) in the US buying up self-storage facilities, speculating their high investment potential in commercial property.  Which begs the question: is there much of self-storage market in South Africa waiting to form part of a REIT?

To give you an idea of self-storage REITs in the US, Real estate investment trust W. P. Carey Inc. has acquired three Florida self-storage facilities from Safeguard Self Storage for approximately $25 million. The purchase was made through CPA: 17 Global, one of W.P. Carey’s publicly held non-traded REIT affiliates.

“We believe that these are very well-positioned and attractive assets. The quality of the assets in combination with the capabilities of the Extra Space management team and our own experience in the self-storage sector makes us confident that this will be a good and stable investment for our investors,” said Liz Raun Schlesinger, W. P. Carey Executive Director

Through its publicly held REIT affiliate CPA: 17 Global, self-storage investor W. P. Carey & Co. LLC has acquired five self-storage facilities : Alabama (1), Louisiana (1) and Mississippi (3) for approximately $17 million. The acquisition comprises approximately 117 348sqm. The properties will be rebranded under the CubeSmart name and managed by the self-storage REIT’s property-management division.

W. P. Carey Executive Director Liz Raun Schlesinger added, “We believe that adding these seasoned assets while retaining the experienced CubeSmart management team will enhance the value and stability of this investment. We know the CubeSmart management team well and look forward to working with them to maximize the value of these assets for our investors.”

outdoor-self-storage-spacesOne may want to argue that self-storage is an American phenomenon. Not so. It is true that self –storage in South Africa was practically non-existent 10 years ago. However, a few agricultural-land owners began building 25 to 50 garages on their plots on city outskirts. They developed the properties in phases as they generated cash flow, building an average of 300 units per facility. These facilities enjoyed an average occupancy of 90 per cent and a decent rental income.

The residential market was the target market for most self-storage firms.  The consumer was largely unaware of the industry’s existence. Marketing was scarce and almost no value added services were included.  It was also extremely difficult to buy an existing facility as the original developers were getting excellent returns and had no motivation to sell. Nor were there any specialty self-storage property-management companies, or an association to welcome potential investors into the industry.

Many of these shortfalls have been rectified. There are now roughly 70,000 self-storage units in South Africa, with an average occupancy of 80 per cent, meaning 56,000 units are occupied at any given time.  As the self-storage industry grows in South Africa, it also evolves. Innovations have been introduced such as precast concrete building systems, which allow a 400-unit development to be completed in just six months at half the cost of brick buildings. Sectional title developments are also available for small investors, who can purchase and register any number of units in a facility, much like purchasing apartments in a complex.

Storage Genie, started by Father and son Herbert and Dylan Wolpe,  is in the process of finalizing deals with American steel-building suppliers to import buildings based on a unique joint-venture strategy. The idea is the buildings are supplied on a rent-to-buy basis. Storage Genie provides the land and management, and the building supplier shares the revenue and future profit from resale.

The South African self-storage industry ranks fifth in the world in terms of the number of operating facilities, according to SASSI. Based in Cape Town, the company promotes the development of and investment in institutional-quality self-storage assets throughout South Africa. Pritty Woman

“The S.A. self-storage sector remains highly fragmented, and recent market turmoil could have the effect of hastening the first round of consolidation or hindering its progress.” Gavin Lucas of ISS (Inside Self-Storage) Depressed market conditions mean there is less capital to support an attempt to take the industry through an initial consolidation. However, the distressed trading environment will also present the opportunity for an established operator with the correct business model and platforms to acquire facilities that are struggling due to their own inefficiencies.

We may not be quite in the ballpark of REITs for self-storage yet but  the self-storage industry is pregnant with possibilities and waiting for savvy players to swoop in and make a go of an industry that shows a great deal of promise both for expansion and investment potential.

US REITs Keeping an Eye on your Neighbour

So it’s a well-worn phrase, “when America has the flu the rest of the world catches a cold.” But it’s hard to deny the influence of US trends. Following trends in the US REIT market may just give you the edge here in South Africa as REITs begin to manifest.

The Property Loan Stock Association have been working with National Treasury for over five years to formalise Real Estate Investment Trust (REIT) legislation in South Africa. The internationally-recognised REIT structure exists in countries such as the US, Australia, Belgium, France, Hong Kong, Japan, Singapore and the UK. So it seems prudent to keep an eye on the international ball as more and more REITs are going to be making their presence felt here in South Africa soon.

Scanning the US, February results highlight the role that dividend yields are playing to attract investors to the REIT sector. Total returns in February were largely driven by dividends, rather than price appreciation. REITs continue to attract investors because their dividends are more appealing than other investment opportunities in the current low interest rate environment.

The strongest in the REIT sector is the mortgage REIT’s 11.49% February dividend yield, although the sector’s total return was 1.65%. Everything once ‘tainted’ with the word mortgage seems to be shaking that stigma as each month progresses. In February, two new home financing mortgage REITs announced IPOs, Maryland-based Zais Financial (ZFC), who raised $201.1 million, and Florida-based Orchid Island Capital (ORC), that raised $35.4 million.

For lodging, regional malls, timber, self-storage and industrial REITs, February dividend yields measured between 2.5% and 3.0%. With the exception of timber, total returns for each of these sectors were negative in February, indicating that investors may not have the stomach for REITs with lower dividend yields.

REITs that own single tenant retail facilities, free standing Retail REITs, climbed to a steady 5.37% in February. Since tenants are liable for all costs, free standing retail REITs’ leases are not unlike bonds in that they generate regular income over extensive periods of time with low risk, especially if the tenant has a strong credit rating.

With monthly returns of 5.35%, returns for Health Care REITs were similar to that of free standing REITs. The positive effects of Obamacare as opposed to the negative impacts of the sequester have influenced investors here. The 4.44% dividend yield helped to fuel the strong monthly returns. It’s becoming clearer to investors that the Healthcare REIT market is less dependent of the US government than previously believed.

A number of REIT sectors had February dividend yields in the 3% to 4% range. Boosted by their dividend pay outs, general shopping centres (3.80%), manufactured homes (4.32%), and office (2.85%) REITs had solid monthly total returns.

One may note that the S&P market did better than the REIT market In February. Although US REIT return growth slowed in February, performance was on a par with wider international market trends. Improving market fundamentals and higher dividend yields continue to attract investors. As we wait for March results there is anticipation that it will be a stronger month than February.

Redefine Restructures Debt Gains Health and Redistribute Dividend Locally

Redefine International, the diversified income focused property company, continues to see significant progress in restructuring its debt facilities. A knock on effect has been the lifting of distributable earnings by 6.6%. In 2013 Redefine will be using its healthy status to acquire distressed properties in the United Kingdom with banks under pressure to dispose of them to reduce their leverage.

The firm has reported that £250million of legacy facilities have been repaid or successfully restructured. This after the reverse acquisition of Whichford, a property investment company based in the UK, which exposed the company to the high level of short-term debt.

The Near term debt maturity profile has been de-risked. There have been advanced negotiations to renew £70.7m of debt maturing in FY2013, the balance of which is to be refinanced or repaid. The Company used £7.8 million to repay the Coronation Facility last year. The £20.0 million facility remains available and is currently undrawn. The extension and restructuring of the £114.6 million Delta facility was also completed last year.

The UK central government, a stable occupier, occupies six of the seven income producing assets which were recently released from security for a £33.5 million repayment. One of the assets is the prestigious Lyon House development site in Harrow, North West of London. Excluding Lyon House the net initial yield from the above assets is pinned at 7.6% with a weighted average unexpired lease term in excess of 17 years.

Subject to meeting limited annual disposal targets the remaining £81.1 million Delta facility balance was extended to April 2015. The disposal proceeds, together with amortisation requirements, will be applied to reducing the facility balance.

Current Debt Repayment and Investment

  • Equity: £8.6m
  • £17.15m Crewe facility cancelled in return for £11.0m cash payment (part funded by Coronation facility)
  • Reduction in interest of £1.0m p.a.

Future Debt Repayment

  • Equity: £8.9m
  • Assumed c£70.0m of near term facilities are refinanced at c60% LTV
  • Approximate annualised reduction in interest charges of £0.5m p.a.

[Source: http://www.redefineinternational.com]

The company which is the JSE listed holding company of Redefine International PLC has reported, in terms of the South African business, distributing 4.38 pence per share. It had also raised around £127m in London, supported by RIN that contributed about £75m.

After restructuring the amount of debt on the balance sheet in relation to the value of the property assets is now below 60% on a pro forma basis.

Income returns accruing from future acquisitions and investments will flow to underlying shareholders in South Africa invested in RIN which has a 65.7% shareholding in Redefine International.

Aveng Grinaker-LTA, Shows Clean Hands and is Ready to Work

Stadia+2010+FIFA+World+Cup+3APHlxny1WDlSA Construction Industry May Need to Wash their Hands before Going to Work.

Avenge Grinaker-LTA has been twiddling its thumbs waiting for the government to stop sitting on its hands. CEO Roger Jardine has a few choice words to say about the future significance of government infrastructure spend and corruption in the sector too.

Roger Jardine - courtesy IOL

Roger Jardine – courtesy IOL

“South Africa is on the verge of one of the most significant infrastructure rollouts in our country’s history. A growing economy needs a strong and vibrant infrastructure and engineering sector. It is important that the procurement process around infrastructure projects be handled with integrity and transparency. Public money matched with private sector capacity can deliver an ambitious vision to grow our economy, create jobs and develop our people. For us to deliver sustainable value for all South Africans, each and every stakeholder needs to clean up all elements of the industry and its relationship with its government and private sector clients.” Announced Aveng Grinaker LTA CEO Roger Jardine on the company website recently.

This comes as South African construction companies wait with baited breath for government to get a move on with its many promised infrastructure projects. The announcement by Jardine is not an exaggeration as time immemorial has seen how government infrastructure projects in history have either been stunning swan dives providing jobs and attending to a country’s failing infrastructure or disappointing belly-flops of red tape, white elephants and corruption. We could be faced with one or the other. Hopefully not the latter, especially in the light of possible investigations by the Hawks and the National Prosecuting Authority into allegations of fraud and corruption in the construction industry.

Since 2008 the South African government’s public infrastructure spend has decreased significantly. Despite ambitious plans announced by government in the 2012 National Budget totalling R844.5 billion, the construction sector has not seen this impact on the order book and only expect this to impact results in the next 18-24 months

Aveng Grinaker -LTA Event Pic 10Aveng Grinaker-LTA is active in the commercial, industrial and retail sector and has an extensive track record of successful contracts in all types of buildings. The Group’s capabilities encompass design, engineering, material selection, procurement and construction. Though last year the firm announced that while most of Aveng Grinaker-LTA business units delivered improved results, a number of problem contracts in Australia and South Africa, combined with the continued challenging construction market in South Africa, negatively impacted the headlines earnings which are down by 58%. .

In Roger Jardine’s press release he said: “We have a big thorn in the side of our economy. Collusive and anticompetitive behaviour, which appears to have been entrenched in the construction and other sectors of the South African economy, has left our country with a disgraceful economic and ethical legacy that must be rooted out as a matter of urgency. We need not only the right skills but also the right ethics and values if South Africa is to thrive and jobs are to be created. It is not only the responsibility of elected politicians to foster trust and integrity in our society. The private sector has a vital role to play. This goes to the heart of the society that we want to build.”

It’s clear that Jardine is taking the allegations very seriously and steps have been taken within the firm to create transparency even including anonymous hotlines for whistle-blowers. In its SENS announcement on the Aveng website the firm advised the market that a provision had been raised for a potential penalty by the Competition authorities.

It’s clear that Aveng Grinaker-LTA are not taking the corruption in the sector allegations lying down, but it’s also evident from Jardine’s statements that he is neither unaware nor doubting the truth of those allegations. South Africa’s construction industry is going to have to wash its own hands before putting them to work.

 

The US Continues to Diversify its REITS Sector

The US continues to see the diversification of its REITS sector. South African REIT watchers are viewing US REITs with interest as their own country saw laws changing this year that are freeing-up the market.

Businesses aim to enhance shareholder value by taking advantage of REITs’ favourable tax treatment. Timber and cell phone companies have already established REITs. Other non-traditional real estate companies, ranging from riverboat casinos to sports arenas and prisons, are also considering the REIT format. Among the emerging subsectors are billboard REITs, which are expected to debut in early 2014.

You may ask how billboards qualify as a REIT? As it turns out the infamous US tax department, the IRS, has relaxed REIT rules by widening the definition of what constitutes “real” property, which is eligible for REIT status, versus personal property, which is not eligible for REIT status. Prior to recent years, the IRS considered whether structures were physically moveable. Recently, however, the IRS has shifted its view to consider the owner’s intent for a structure. Therefore, if owners intend for structures to be permanent, like billboards or cell phone towers, the companies can now qualify for tax treatment that is appropriate for real property, making them eligible for REIT status.

Quite how the South African players will manipulate the market when the new REIT structure will come about this year is hard to tell but it may be worth watching how the US trends play out. The case in point is an arguably obscure Billboard REIT.

There are just a handful of players in the US billboard markets.
– CBS Outdoor America is to be converted to a REIT. The plan is to sell outdoor operations in Europe and Asia. Analysts value the business at $4-6 billion. Upon IRS approval the REIT conversion should be up and running by 2014.
– Louisiana-based Lamar Advertising, with a market cap of $4Billion has announced plans to pursue REIT status.
– Clear Channel Outdoor, the second largest firm in outdoor advertising in the world, reported that they have no current plans to convert to a REIT.

But alas, the billboard REIT subsector is considered to be looking at very modest growth over the next few years. Any growth that is forthcoming  is likely to come from acquisitions, given the fragmented nature of the industry and hence the scope for consolidation.

Another challenge faced by billboard REITS is that of rents which are exceptionally dependent on the health of the economy. In difficult economic times, it is easy to pull back on billboard advertising.

On the up-side, growth is expected from digital billboards and posters, with higher rents as they become more commonplace. Digital displays allow advertisers to change their messaging more often, allowing them to target demographically at different time periods. Wifi technology also enables advertisers to send ads from billboards to mobile phones adding further flexibility.

The IRS has ruled that billboards qualify as real property. Specialized REITs have been very popular in recent years, but in the crowded REIT space, it remains to be seen if this new property class with modest organic growth prospects will pique the interest of US investors. Whether South Africa will see this same rush to ’REITise’ every industry remains to be seen. If all the property companies currently listed on the JSE adopt the REIT structure, South Africa will boast the eighth largest REIT market in the world.

Cromwell On Track for Diversification

Cromwell announced on the Australian Stock Exchange on 7 December 2012 that it was undertaking an equity capital raising of up to AUD163 million to seed a new unlisted property trust, reduce debt and provide additional working capital. Cromwell announced this month that an increase in  operating earnings is driven by the secure revenue stream from its Australian property portfolio.

Cromwell Property Group (CMW, formerly Cromwell Group) is an internally managed Australian property trust and funds manager with an Australian property valued in excess of $1.8 billion and a funds management business that promotes and manages unlisted property investments. Cromwell has two key business units which focus on property investment activities; from equity and capital raising to property management and leasing.

The Cromwell Capital Raising is being undertaken by way of underwritten institutional placements of new Cromwell stapled securities (“New Securities”) at an issue price of AUD0.785 per New Security to raise up to AUD143 million and a non-underwritten security purchase plan (in terms of the rules of the Australian Investments and Securities Commission) to eligible Cromwell security holders to raise up to AUD20 million (GBP13 million)

The Company subscribed for AUD40 million (£26 million) worth of new securities in the capital raising. Furthermore, the placement was subject to a sub-underwriting commitment from Redefine Australian Investments Limited (the Company’s 100% owned subsidiary) for which it received a cash fee of AUD800,000.

The Company’s current shareholding in Cromwell is 321.5 million securities or 22.84% (31 August 2012: 22.08%)

The transaction is in line with Redefine International’s objective of increasing its presence in the Australian property market and is expected to be earnings enhancing for shareholders in the medium to long-term.

Cromwell Property Group (ASX: CMW) today reported at the end of February a 24% increase in operating earnings to AU$45.9 million for the six months to 31 December 2012, driven by the secure revenue stream from its Australian property portfolio.

During the period, Cromwell completed an institutional placement, raising $143 million and an SPP for existing security holders closing in early February 2013, raising approximately $39 million. Both were materially oversubscribed.

Cromwell announced this week that it will continue to seek investment property and funds management opportunities consistent with its strategy of providing superior, risk-adjusted returns to security holders and investors over the long term.

 

“We are seeing increased competition for property assets, indicating property values may soon enter a new period of growth as cap rates reduce to close the yield gap between property and other asset classes.” Chief Executive Officer Paul Weightman .

 

“We have the skills, resources and capital to take advantage of opportunities for growth, however we remain, committed to maintaining the disciplines that have contributed to our consistent outperformance.”

 

 

 

US REITs Reward Investors With Solid Growth and Strong Dividend Pay-outs

REIT

REIT

Believe it! The FTSE NAREIT ALL REIT Index returned 6.05%, outperforming the NASDAQ (+5.53). So far this year the US REIT sector has experienced steady, healthy growth. Analysts’ predictions, looking into 2013, range from a firm thumbs-up to cautiously optimistic.

To kick off, there seems to be an increased demand for warehousing which is being attributed to the US general economic recovery. Industrial REITs are benefiting as a result.  Year-to-date, the sector posted 8.90% return. Many believe that Prologis (PLD), whose $16.75 billion market capitalization represents almost 75% of the US industrial REIT sector, has driven the sector’s expansion.

In January, Prologis announced plans to set up a REIT in Japan through Nippon Prologis. PLD has also announced an agreement with Amazon.com to build a more than one million square foot distribution centre in Tracy, California!

Lodging REITs are also performing well in the new year, most probably based on the anticipated economic strengthening in 2013. Year-to-date through February 15th, the lodging sector returned 9.74%.

As the U.S. housing markets strengthen, the demand for lumber is growing. In December, housing started climbing to an annual rate of 954,000, the highest rate in more than four years. (In the US most houses are made of timber.) The result sees the timber REIT sector growing by  (8.89%).

Bucking the trend slightly is retail. Despite an improving economy, concerns remain about growth in the retail sector. The overall return for retail REITs so far in 2013 is 5.59%. Market fundamentals have benefitted from the lack of new construction (of retail), but retailers are cautious about expanding. Retail sales growth in early 2013 is positive.

On the other hand Office REITS are up (5.59%) – looking steady. Office market fundamentals in the large coastal markets are good, but office returns have been moderated by many markets that have not yet recovered.

Returns for healthcare (6.42%) REITs are solid. Many believe that the healthcare sector received a boost from Obama’s November victory and the early stage implementation of Obamacare, with increased demand for health services.

Of all the REIT subsectors, mortgage REITs are among the strongest, with a return of 11.44% year-to-date. Coming into the New Year, Annaly Capital Management (NLY), a residential financing REIT, announced plans to merge with CREXUS (CXS), a commercial mortgage REIT in late January.

” The real estate sector is currently benefiting from a number of tailwinds that include the general search for higher yield (REITs pay dividends) and lower volatility, better data emerging from key markets and the U.S. Federal Reserve’s continued focus on the mortgage and housing markets, EPFR Global said in a press release on Friday,” Kenneth Rapoza wrote for Forbes

The positive effects of low interest rates for mortgage REITs continue to outweigh the negative implications of mortgage prepayments that drew the sector down in 2012.

So it’s clear that Lodging and Industrial REITs are benefitting for the US economic recovery. Retail and apartment fundamentals are good, though a little uncertain. Housing market recovery is fuelling growth among timber REITs. Due to their strong dividend pay-out and improving market fundamentals investors continue to favour REITs.

 

 

Opportunity Knocks in SAn Rural Areas

ShopRite2Shopping Centres in rural areas are becoming more sophisticated and formalised; it’s the place to do business rurally.

Some towns have up to 600 000 people, and consumer demand for convenience as well as steady population growth offers major prospects for retailers.  In South Africa, people living in rural areas and townships (or second economy locations) spend more than R 308 Billion annually, representing 41 per cent of total consumer spending. [The Retail Lab]

The similar research shows that South African Shopping centre development trends are moving towards an oversupply situation in urban areas, yet retailers are still cautious when it comes to considering the opportunities within township and rural areas.

Some of South Africa’s most successful retailing operations have ploughed this field for some time. Shoprite is a prime example.   Shoprite had the foresight well ahead of their competitors. Shoprite has over 1500 stores, making it Africa’s largest grocery chain and in a prime strategic position not only in South Africa but on the African continent.

Other retailers active in this arena include cell-phone retailers, some of the banks and clothing outlets who trade in areas where there is currently little competition.   Opportunities abound for retailers, especially franchises and stores in fast food, groceries, fashion, mobile, electronics, financial services, furniture and hardware.

Secondary Market shoppers are brand conscious, no-name knock-offs don’t impress. Those in the market encourage interaction with the community, becoming involved in community life is essential. One must find ways to of make goods and services relevant and be seen to be socially active and responsible.

Retail in South Africa’s rural areas or “emerging economic areas” is growing and this success is evident in the retail sales and trading densities in these centres. Statistics show that the last decade has seen a significant increase in the number of retail centres being developed in townships and rural areas in South Africa.

“Townships and rural areas in SA have emerged as a new market for national retailers as we see an upward movement amongst township communities in terms of expendable income. This progressive movement has resulted in a considerable increase in shopping mall development in these previously untapped areas.” Said Marc Edwards of Spire to Cyberprop recently.

Edwards goes on to advise partnering with experts in the field; to appoint strong community based centre managers; to stay close to the community and to ensure the centre is valued; to ensure public transport is available to shoppers; to sponsor community events; to cater for bulk buying and above all carefully research what the needs of the community are.

“Rural areas offer a real cash economy and well marketed tenants who have done their homework will be successful,” concludes Edwards.

 

 

A Darker Reason Why SA’n Business is Moving into Africa?

Reports abound of more and more South African companies doing business in Africa, but why are they not investing that money locally, are there challenges to making development work locally? Looking back over the last few quarters some disturbing stories have emerged.

It can’t be a good sign when you hear the news that a company like Resilient is looking elsewhere to do business.

Des De Beer (courtesy FM)

Des De Beer (courtesy FM)

Johannesburg-based real-estate investment company Resilient, which has a local market capitalization of 11 billion Rand is looking to Nigeria to expand its business. This on its own is not a worry since many SA firms are expanding into Africa. However it’s the stated reasons and comments from its executive that raise some eyebrows.

According to The Citizen’s Micel Schnehage, Resilient’s Director Des de Beer explained that it’s the firm’s struggle with local government. “(Resilient) is hampered by extensive bureaucracy and red tape, resulting in expensive delays.” He went on to state that the era for Resilient to develop non-metro malls was over.

What seems to have been the last straw was the loss of documents pertaining to the Mafikeng Mall by local authorities 17 times. “They’re not accountable to anyone so they don’t really care,’’ said de Beer.

Unlike South Africa, is the implication, Resilient believes there is a sincere intention in Nigeria to see the country raised up and that officials are largely positive facilitators of the investment process.

Another big player in the industry, Redefine, the second largest listed SA property loan stock company by market cap on the JSE, with assets exceeding R37bn, claims to be hampered by red tape.

The value of the group’s properties declined by 1.7% in the review period while the South African portfolio valuation increased by R260million. Red tape involving local authorities and other government departments are holding back developments in rural areas.

Redefine’s CEO Marc Wainer

Redefine’s CEO Marc Wainer

Redefine’s CEO Marc Wainer announced last year that Redefine intended to launch a shopping centre of between 20 000m² and 30 000m² in a rural area which could create between 4 000 and 5 000 jobs. This includes cleaners, security guards and other workers needed by retailers.

However, Wainer said instead of the authorities welcoming these developments, processes are being frustrated by officials wanting their palms greased before setting the ball rolling.

The Redefine head said retailers are keen to enter into rural areas with a growing segment of the market’s buying power increasing in terms of social grants, but are now rather opting for Africa. Wainer cited a recent announcement by Liberty Properties to opt for its new growth in Zambia. “It’s easier to do business in Africa than South Africa,”  Wainer told reporters. He added that money being spent offshore should be spent locally, but conditions frustrate this.

In an interview with CitiBusiness  Wainer lashed out at government, criticising the administrative practices of local authorities. At the time he added Redefine was not going to invest in areas where bribes were expected, citing the former Hammanskraal as an example.

But this doesn’t mean everything’s rosy in Africa either, doing business where local authorities are concerned can be a red tape head ache for developers in general. By way of example consider Steven Singleton’s  story.

Steven Singleton wrote to the Daily Maverick about his struggle in setting up a Private hospital in Zambia where he was frustrated at every turn by Zambia’s top banker and business mogul Rajan Mahtani: “Business in Zambia is very much like this and magnates such as Mahtani make sure it stays that way and he retains control.

In my case I offered him what I considered to be “a project on a plate” and, instead of rewarding the provider, he not only took the project, but the plate as well. Why? Because he could, and there was no recourse to be had.

This is all too often the nature of doing solo business in Africa. Powerful and politically connected parties are able to move with relative impunity as long as their alliances are intact or until a change of regime shifts the balance of their power base.”

Although not the same situation, the dynamics are similarly reported when trying to do business involving local authorities in South Africa it seems.  Whether this is an African challenge or a South African challenge, developers have their work cut out for them as they try to invest and develop under

Datacentre REITs Take Off

Datacentre

Datacentre

Demand for datacentre space has grown as more companies are using cloud-based data storage. Growth in Internet traffic and smartphone usage, including mobile apps and online video, is also driving demand. Datacentre REITs are currently performing well and are popular among investors who are attracted by their high dividend pay-outs as well as by growing demand for datacentre real estate.

The sector became overbuilt during the dot.com bubble and suffered when the bubble burst and demand dried up. The strength of the sector could push other datacentre companies to go public or adopt the REIT format. One example of this is Equinox a company operating datacentres for the likes of AT&T and Amazon.

REIT watches, REIT Café, recently drew attention to three particularly strong datacentre REITs:

• CoreSite Realty (COR), with market capitalization of $580 million, is most similar to CONE. COR is the smallest datacentre REIT, but its stock value has increased 33% since the end of October, and its dividend yield measures 3.6%.

• Digital Realty Trust (DLR) is the largest of the three data centre REITs with market capitalization of about $8.4 billion. Its stock value increased more than 16% since the end of October, and its dividend yield is 4.1%.

• DuPont Fabros Technology (DFT), with market capitalization of $1.5 billion, is the second largest data centre REIT. Its stock value grew 14.8% since the end of October, and its dividend yield measures 3.3%.

“This combination of low leverage and adequate liquidity places datacentre REITs in a good position to take advantage of acquisition and development opportunities that are in the best interest of the company,” said Jim Stevens, an analyst with SNL Financial. The data centre sector could double in size in the next few years, according to Stevens.

Exciting news concerns a new kid on the block CyrusOne (CONE). CyrusOne has raised $313.5 million when it sold 16.5 million shares at $19 on January, 18th. CyrusOne hails from Texas with 24 data centres in Texas and Ohio. The company is 72% owned by Cincinnati Bell, therefore bringing the total market capitalization to around $1.3 billion. Cyrus One has performed well during its first week. By Thursday, January 24th, shares of CONE were up more than 15% to $22.01. Cincinnati Bell, who purchased the company in 2010 for $525 million, will make a significant profit from the sale.

Notwithstanding on-going growth in the data centre industry, the sector faces increased competition, as firms like CONE show up on the doorstep and existing REITs look to grow. The increased competition could effect future expansion opportunities and result in lower returns. Although oversupply hasn’t emerged yet, investors ought to caution on the side of future overbuilding.

Redefine Restructures its VBG Portfolio

Redefine International

Redefine International

Redefine is sticking with its strategic business objectives to realign and enhance the overall quality of its core property assets by restructuring all four of its VBG assets.

In line with its strategic business objectives, Redefine has started disposing of non-core properties and replacing them by acquiring large, well-located high-grade investment properties that are intended to expand and enhance the earning capacity of the prime properties in its portfolio.

In an interim Management Statement, Redefine Chairman Greg Clarke highlighted the successful raising of capital and how it had addressed many of the company’s legacy debt issues as well as positioning the firm into an acquisition phase. It is reported that 94 million pounds have been invested to date. The restructuring of all four of Redefine’s VBG assets is now complete.

Menora Mivtachim and Redefine are 50/50 partners. Menora Mivtachim, one of Israel’s largest finance and insurance groups, acquired the VBG portfolio as part of a joint venture. The portfolio comprises four office properties located in Ludwigsburg , Berlin, Dresden and Bergisch-Gladbach with approx. 44,000 sqm of space let under long term leases to the main tenant Verwaltungs-Berufsgenossenschaft (VBG), a public accident insurance institution.

The transaction was performed with the support of Cushman & Wakefield (C&W) who advised Redefine International on the restructuring and identified the joint venture partner as part of a structured bidding process. The portfolio was burdened with liabilities which were securitised in 2007 in the form of commercial mortgage-backed securities (CMBS).

As part of the restructuring, Redefine International sold a nominal amount of 49% of shares of the holding company to Menora Mivtachim and a further 2% to a private investor and increased its equity base. The investor consortium acquired DG Hyp as a new equity provider. At the same time, Redefine International and the newly formed consortium negotiated with the credit administrator and creditor special servicers regarding details of the credit restructuring and the disposal of the portfolio.

Greg Clarke

Greg Clarke Chairman of Redefine International

After completing a purchase agreement, the properties were sold to anew property company subsidiaries for a net amount of 80 million Euros. The proceeds from the sale enabled the restructured CMBS financing to be repaid.

Redefine also announced the acquisition of a recently developed retail property in Hückelhoven, Germany. The property was acquired through the Group’s jointly controlled entity RI Menora German Holdings representing the fourth acquisition in the joint venture with the Menora Mivtachim Group. The property has a value of €11.6 million and has a non-recourse senior debt facility of €7.9 million secured against it from Bayerische Landesbank.

Greg Clarke, Chairman of Redefine International, commented: “The period under review has been transformative for the Company… into a more proactive acquisition phase which will lay the foundations for the future delivery of shareholder value.”

Basel3 – As Basel 3 Relaxes will Property Funds Grow?

6679ae72-bff7-4f42-b13d-3448ce5e570c_453122_EN_BaselIIIIf South African banks save on costs following a decision by the international banking authorities to ease global banking liquidity standards, will listed property funds benefit? The short answer is that nobody is speculating, but what of Basel 3 in general and its effect on African real estate.

In short local and global banks have been told by the Basel Committee on Banking Supervision to raise capital levels, as a buffer against losses and unexpected shocks to their business.

It has been expected that costs will increase especially for longer term products e.g. mortgage products, which would see individuals finding it more expensive to acquire homes. Banks would require larger deposits before providing mortgage loans, and coupled with the fact that the savings rate among individuals in South Africa has always been at low levels, would mean that fewer individuals would be able to afford properties. This would have an adverse impact on the property market, with lower demand for properties likely to cause further downward pressure on property prices and thence property funds in a market still trying to recover from the effects of the 2008 credit crunch.

So Basel 3 — the most stringent of regulations enacted on local and global banks since WW2 and which comes into effect this year — will have a huge effect on real estate funding for investors and developers moving into Africa, so says Standard Bank head of real estate for Africa Fergus Mackintosh in an interview with Business Day.

Mackintosh said his biggest concern is the effect the implementation of Basil 3 would have on debt-funding requirements, especially for investors and developers moving into Africa. “There are going to be huge changes in terms of funding requirements from the banks and the reality is that investors and developers would need to come up with a lot of their own equity and have good partners and deep pockets,” he said.

However, this week saw announcements that international banking authorities will ease global banking liquidity standards. Following the 2008-09 financial crisis, the Basel Committee on Banking Supervision developed a “liquidity coverage ratio” to ensure banks had enough unencumbered, high-quality liquid assets to survive a 30-day stress scenario. However, the Basel committee this week endorsed a package of amendments to its requirements. The committee said the liquidity coverage ratio “will be introduced as planned on January 1 2015 but banks will be given up until January 2019 to meet all the standards”.

In short this means South African banks’ need for a liquidity facility is reduced. The knock on cost savings to banks is welcome. How this will affect property funds is up for much speculation. One point of discussion is an increased general confidence in the sector is expected. Investors feel more comfortable knowing the banks have less pressure placed on them by Basel 3.

Some analysts believe that aggressive regulation risked inhibiting economic growth and a consequent tightening of purse strings for property funds, as some banks raised concern that this could push up the cost of lending. So will relaxing of regulations see a drop in the cost of lending, property funds could benefit in this regard? Watch this space.

Crowdfunding – Will South African Real Estate Bite

Crowdfunding

Crowdfunding

Is it possible that investors will second guess putting their cash into Real Estate Investment Trusts (REITs) in favour of Crowdfunding? Why hasn’t South Africa got a Real Estate Crowdfunding platform? Shouldn’t someone be considering it?

It may seem unlikely that anyone will waver in favour of Crowdfundings whilst pondering investing in REITs right now, especially in South Africa since no such option exists, but already in the US, Real Estate Crowdfunding platforms have emerged. For instance, Fundrise was founded by Ben and Dan Miller, who spent the last few years building up a booming commercial real estate business. Frustrated with Wall Street investors, the brothers decided to build Fundrise to democratize the process of investing in commercial real estate.

Given the novelty of Crowdfunding many remain in the dark. According to Wikipedia Crowdfunding, or hyper funding “describes the collective effort of individuals who network and pool their resources, usually via the Internet, to support efforts initiated by other people or organizations.” Crowdfunding is utilised widely to fund blogs, political campaigns, scientific research, start-up companies, music, the arts, as well as so called Angel Investing and now even real estate.

Ben Miller of Fundrise: “We felt that the private equity funds we looked to raise money from typically had no natural connection to the neighbourhood buildings we were developing,” So the brothers cut out the traditional middlemen and created the opportunity for direct investment. Now Ben says they believe that Fundrise “provides a platform that can revolutionize who influences neighbourhood development by giving the general public the opportunity to invest in and own local real estate and businesses.”

Forbes estimates that annual Crowdfunding transactions go as high as $500 billion annually compared to 2011’s $1.5 billion (anticipated to be $3 billion in 2012).  If Crowdfunding even begins to approach that scale, it will completely change the landscape for start-up financing.

To get one’s head around the concept of Crowdfunding a trip back in time may be required. Wiki describes Crowdfunding as having an historical antecedent in the 18th century idea of subscription. Back in the day many artists and writers found it difficult to find publishers for their books, and instead persuaded large numbers of wealthy benefactors to ‘subscribe’ in advance to their production.

Marillion

Marillion

Today Rock groups like Marillion and Electric Eel shock have funded tours and albums using Crowdfunding platforms. Independent films are booming thanks to raising funds with Crowdfunding.

In essence Crowdfunding is a form of “Micro patronage”, a system in which the public directly supports the work of others, donating via the Internet. This is as opposed to traditional patronage now many “patrons” can donate small amounts, rather than a small number of patrons making larger contributions.

Sticking with our example, how does Fundrise work? The first offering on the site allows users to buy shares in 1351 H Street NE , a restaurant location on the booming H Street Corridor in Washington DC. The building is leased to Maketto that combines a Japanese-themed culinary “night market” with a clothing boutique for DURKL, a popular DC-based street-wear company. By investing in the project, you get a portion of the 10 year lease proceeds (projected to be 8.4% year), a portion of the profits of Maketto, and a portion of the future appreciation of the building.

Allen Gannett of TNW explains about Fundrise thus: a $100 share qualifies you for Kick-starter-style rewards, as well as access to shareholder events and parties. For $1000, you get a 10% discount on all food purchases and DURKL clothes and for $10,000, you get an annual dinner prepared by their chef. By combining economic rewards with Kick-starter-style benefits, Maketto gains a population of customers who are literally invested in its success. Ben explained that “by giving the neighbourhood and potential customers the opportunity to become your partner, Fundrise creates a whole new form of brand loyalty.

Other African countries are emerging as if Crowdfunding was designed for Africa. Countries long considered on the periphery of the world economy are benefiting. “We want to get Africans into the crowdfunding space to invest in Africa’s own start-ups,” said Munyaradzi Chiura, head of GrowVC’s Africa operations in Harare, Zimbabwe to Crowdsourcing.org. “Crowdfunding is particularly suited to the African context because the amounts are small, thereby reducing the risk, and investors are not going it alone.” Projects in which “anyone can invest” could receive backing from outside Africa.

South Africa’s has an important Crowdfunding platform in Crowdinvest. Investing with the businesses it backs may allow unusual rewards: investors in a film, for example, would get walk-on roles or on-screen credits. On the other hand, it also offers more conventional schemes, with investors in small firms and start-ups getting a share of the profits or of the company’s ownership. It runs checks on any business wanting to register: “It’s not open to anyone to upload a pitch,” said CEO and founder Anton Breytenbach.  Crowdinvest returns the funds to users if the full amount sought isn’t raised, after which the project will shut down.

Barak Obama

Barak Obama

Considering that the US leads the way in so much, it’s worth noting that this year, President Barack Obama signed the JOBS (Jumpstart Our Business Start-ups) Act; this piece of legislation effectively lifted a previous ban against public solicitation for private companies raising funds. As of August 13, 2012, the Securities Exchange Commission has yet to set rules in place regarding equity Crowdfunding campaigns involving unaccredited investors for private companies; however, rules are expected to be set by January 1, 2013. Currently, the JOBS Act allows accredited investors to invest in equity Crowdfunding campaigns. In South Africa no such legal framework has been ventured and so far no one has challenged existing legislation that may impede the growth of Crowdfunding.

Considering the ups and downs, one has to look favourably on Crowdfunding in that it allows good ideas which do not fit the pattern required by conventional financiers to break through and attract funds through the ‘wisdom’ of the crowd. Proponents also identify a potential outcome of Crowdfunding as an exponential increase in available venture capital. On the down side, business is required to disclose the idea for which funding is sought in public at a very early stage. This exposes the marketer of the idea to the risk of the idea being copied and developed ahead of them by better-financed competitors.

So is there someone in South Africa ready to take on Crowdfunded real estate? It may not hold the lofty promise of creating high growth tech companies, but it does offer people the chance to own a piece of their neighbourhood. “Its social innovation meets investing” says Ben Miller of Fundrise. He believes that Crowdfunded real estate is providing a means for community member’s access to collaborative investment, while becoming part owners of the spaces and people they support. We could do with some of that in South Africa. Right?

African Growth: Competitive Investment and at What Price?

Courtesy - The Economist

Courtesy – The Economist

Africa for so long a collective of querulous bankruptcies and killing fields has seen its coffers increasing and democratic advances reaping peace and prosperity.  The International Monetary Fund predicts sub-Saharan Africa growing at 5.4 per cent this year compared to 1.4 per cent for developed economies.

Africa’s is home to some of the world’s fastest growing economies and rapidly rising disposable incomes. A decade of relative political stability has also helped the case for African investment.

New investors come expecting bargains because the continent is still seen as poor. However investors looking to buy into future growth are now paying a premium due to sellers savvy to opportunities being fewer and further between.

Sub-Saharan Africa’s attractiveness as an investment destination has risen to fifth place in 2012 from seventh in 2011, according to a survey by the Emerging Markets Private Equity Association. Opportunities traditionally existed in mining but speakers at Reuters Africa Investment Summit in September have pointed to consumer and banking services sectors as the next big thing.

Africa’s largest telecoms operator MTN is a perfect example of a company that paid what was considered a weighty price at the time, for the right to commence operations in Nigeria 11 years ago. It paid $285 million for a mobile license, now it has over 41 million subscribers and banked revenues of 34.9 billion rand ($4.47 billion) in 2011.

Actis, a private equity firm in emerging markets, said it was recently outbid in a North African deal by a trade buyer that offered 12 times EBITDA (Earnings before interest, taxes, depreciation and…). Valuations on the continent are, however, cheap compared with price demands in bigger emerging economies in Asia. Speaking to Reuters, John van Wyk, the firm’s co-head for the region said: “Valuations, depending on the sector, can be quite high but … compare that to the 16 times EBITDA multiple you are being asked for in India or China, that’s kind of stratospheric stuff.” “We are quite bullish about the continent but Africa doesn’t come without its challenges,” van Wyk said.

It seems that it is not unusual for new investors on the continent to make the mistake of coming with preconceived ideas of where valuations should be.

The world’s biggest retailer Wal-Mart bought a majority stake in South Africa’s Massmart for $2.4 billion in 2011, a 19 per cent premium to the 30-day volume weighted average price. With that has come a great deal of political and legal manoeuvring that remains to be finalised.

Even where companies are willing to pay a premium for a good target, companies of the right size are hard to come by. Every big African brewer, for example, has been nailed down, according to SABMiller’s head for the region, Mark Bowman. “No one is getting anything for a reasonable price any more; you are paying for a future opportunity a significant premium. Anything that would become available would be aggressively priced and one would have to take a view if it’s worth it,” he told Reuters. Diageo, consumer goods companies with a portfolio of world-famous drinks brands, dug up a heavy $225 million for an Ethiopian state brewery last year, months after Heineken paid $163 million for two other beer makers in that country.

Emerging Capital Partners is opening an office in Nairobi, its seventh office on the continent, to grab east African opportunities. Alex-Handrah Aime, a director of the Africa-focused ECapitalP: believes that one way of bridging the valuation gap is for buyers to start with a convertible bond, instead of taking up equity at the onset. Private equity firms need to avoid auctions to keep a lid on valuations, she told Reuters. “It’s a competitive process. If you end up in an auction situation … the person who pays the most is going to win. That’s not necessarily the valuation that is going to be most sensible.”

Some investors have turned their backs on what they see as inflated prices. South Africa’s second-largest banking group First Rand dropped its bid for Nigeria’s Sterling Bank last year after the two disagreed on price.

Interestingly Middle East investors, though slow to join the fray, are competing for investment opportunities on the continent. Not short of oily billions and short of investment opportunities in the developed world, Africa is looking attractive.

However challenges have been quickly recognised. One is the relatively small size of potential deals. “The Middle Eastern sovereign wealth funds are very interested in Africa, the challenge that they face is the increment at which they need to invest is way too large for the continent at the moment,” Diana Layfield, Africa chief executive at Britain’s Standard Chartered Plc. told Reuters in an interview on the side-lines of the World Economic Forum on Africa.

“Definitely there will be more (investment) coming to Africa,” Saudi Arabian Minister for Agriculture Farad Balghunaim told Reuters. “With the clear vision that is building up in African leadership now, there will be more and more investors from Saudi Arabia,” he said in Addis Ababa.

However accessing growth is not a given. There is a lack of liquidity in public capital markets. For private equity bankers, there is often a shortage of deals that can meet their mandate when it comes to size. For example, emerging markets private equity firm is reportedly aiming for individual deals of $50 million or more in Africa, meaning it has to focus on the continent’s biggest economies – South Africa, Egypt and Nigeria – to find deals.

Dubai’s Abraaj Capital is in the process of acquiring UK-based private equity firm Aureos Capital, which invests in small and medium-sized businesses in Africa, Latin America and Asia. “We tend to have a sweet spot at around $10 million, but we have investments as low as $2 million and going up to about $35 million,” Davinder Sikand, Aureos’ regional managing partner for Africa told Reuters.

“Our focus has been to build regional champions. So we’ll take positions in businesses that can demonstrate management vision and build (them) out, recognising that each of our markets other than Nigeria and South Africa are fairly small markets, and you need to build that scale.”

Due to the constraints in their home markets, Middle East investors are familiar with Africa’s challenges, such as the poor infrastructure, the shortage of a highly trained workforce and the lack of liquidity in capital markets.

Frederic Sicre, a partner at Abraaj Capital told Reuters: “Behind us are 200 of the wealthiest merchant families, royal families from the Middle East, and sovereign wealth funds from the Middle East. We can pull them in to looking at the infrastructure development space, or the big utility development space, into looking at the opportunities here.”

Clearly the continent has become a far more competitive place than it used to be. Despite many target deals being on the small side for the bigger players, the expected returns are considered reward enough in the long term. Africa, -keep doing what you’re doing and you’ll keep getting what you’re getting. If democratisation continues, peace will abound and prosperity should follow the necessary hard work buoyed by investment.

Hilton Buy-to-Let – Opportunity Knocks

Hilton College, synonymous with the town of Hilton, caught headlines earlier in the year for its announcement that it plans to sell off a substantial bundle of its estate for a housing development.  Since the school claims it’s in no financial difficulty one can’t help feeling if the time is right to invest in the small but prosperous town.

One may ask, ‘what do they know that we don’t’. Hilton’s trustees have made available 100ha of prime land for an exclusive residential estate expected to net at least R90 million when complete. The school spokesman told the press that it all had to do with the school becoming prohibitively expensive at R190 000 a year and how it needed to be more relevant and offer opportunity via bursaries to the previously disadvantaged.

The Gates of Hilton, as the development will be called, is not about charity, it’s about some very wise investing as Hilton sees itself become the target of people moving up the hill from Pietermaritzburg and even Durban. The first 50 sites of The Gates of Hilton have already been made available to those with connections to the school.

Not far away is Ambarlea, an excellent rent-to-buy residential development, more than 40 units of which have recently been sold. Gated communities are so commonplace that they are springing up unnoticed. Ambarlea offers automated access control and palisade perimeter fencing. Hilton has long been regarded as an upmarket residential destination, with a wide range of quality family homes but very little suited to first-timer buyers, investors or retirees. Developments like Ambarlea are offering one and two bedroom apartments, among others. Entry level pricing is at R595k at one bedroom, the two bedroom apartments are priced at R850k. The complex is within walking distance of the village, hence the buy-in from Hilton College parents, young professionals, retirees and investors.

Champagne air and cooler summers lacking the humidity of the coast, spacious properties and abundance of good public and private schools, including Hilton College and St Anne’s, this is a location which is ideal for healthy family living or entertaining in country style. Security is an increasing need among home buyers, which makes the freedom of a village such as Hilton and its low crime profile so desirable.  Houses with large well-kept country gardens on stands of 2000sqm are available as an excellent buy-to-rent opportunity.  Prices range between the R1.4m to R2.5m mark.

With the upgraded Oribi Airport in Pietermaritzburg so easily accessible and today’s advanced technology and connectivity, they are also finding that more residents choose to live in Hilton and commute on business to other areas and regions, including Gauteng. Gateway to the popular Midlands Meander, Hilton is only an hour from the Drakensberg Mountains and 10 minutes from Pietermaritzburg.

Other developments in the Amber –range are Amberglen,  Amber Valley and Amber Ridge offers a range of unit options and pricing within a secure and picturesque environment.  Also on the buy-to-rent list of opportunities is Amber Ridge, the latest of nearby Howick’s popular “Amber” retirement villages. Since its late 2011 launch, 65 of its intended 200 units have been sold, with first occupation having taken place in May 2012. While a separate village in its own right, with its own body corporate, frail care, community centres and wildlife conservation area, it will share these facilities with its neighbour, Amber Valley. In turn, Amber Ridge residents will have reciprocal access to Amber Valley’s facilities, which include a large frail care unit, two heated swimming pools, a library, communal dining room, snooker room, various function rooms, a gymnasium, a pub, Astroturf bowling green, two tennis courts, bass and trout fishing dams, and walks in the designated game estate area.

Hilton is clearly emerging as a property investment magnet with everything from small units, gated communities and grand old homes with bed n’ breakfast potential to retirement accommodation.

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Investing in Africa, Good News, Bad News and Faux Pars

Accra Mall Ghana

As people around the globe eye Africa for potential investment and South Africans head north there is some encouraging news to feed those ambitions, worrying reports to temper our enthusiasm and some mistakes to learn from.

Ghana’s capital Accra is awash with educated, well-dressed young up-and-coming people, driving top-of-the-range cars living in stylish houses. It’s indicative of Ghana’s economic growth, 14.4% last year. According to the World Bank many African economies are forecast to be among the world’s fastest growing in 2012. Top of that list are the DRC, Nigeria, Ghana, Liberia and Ethiopia.

US-based business consulting company Ernst & Young reports: “There is a new story emerging out of Africa: a story of growth, progress, potential and profitability.”  US secretary of state for African affairs, Johnnie Carson is quoted as saying that Africa represents the next global economic frontier. China’s trade with Africa reached $160 billion in 2011, making the continent one of its largest trading partners.

London based magazine The Economist reported last month: “Since The Economist regrettably labelled Africa ‘the hopeless continent’ a decade ago, a profound change has taken hold.” Today “the sun shines bright … the continent’s impressive growth looks likely to continue.”

Africa’s trade with the rest of the globe has skyrocketed by more than 200% and annual inflation has averaged only 8%. Foreign debt has dropped by 25% and foreign direct investment (FDI) grew by 27% in 2011 alone.

Despite projections for growth in 2012 being revised downward due to the so called Arab Spring , Africa’s economy is expected  to expand by 4.2%, according to a UN report earlier in the year. The International Monetary Fund (IMF) is expecting Sub-Saharan African economies to increase at above 5%. Added to that, there are currently more than half a billion mobile phone users in Africa, while improving skills and increasing literacy are attributed to a 3% growth in productivity.

According to a UN report the think tank,  McKinsey Global Institute writes, “The rate of return on foreign investment is higher in Africa than in any other developing region.”

An end to numerous military conflicts, the availability of abundant natural resources and economic reforms have promoted a better business climate and helped propel  Africa’s economic growth.  Greater political stability is greasing the continent’s economic engine. The UN Economic Commission for Africa (ECA) in 2005 linked democracy to economic growth.

All this growth and urbanisation is putting a strain on social services in the cities, it has also led to an increase in urban consumers. More than 40% of Africa’s population now lives in cities, and by 2030 Africa’s top 18 cities will have a combined spending power of $1.3 trillion. The Wall Street Journal reports that Africa’s middle class, currently estimated at 60 million, will reach 100 million by 2015.

Then there’s the more sobering news.  “A sustained slowdown in advanced countries will dampen demand for Africa’s exports,” writes Christine Lagarde, managing director of the IMF. Europe accounts for more than half of Africa’s external trade. Tourism could also suffer as fewer Europeans come to Africa, effecting tourist dependent economies like Kenya, Tanzania and Egypt.

The South African Reserve bank warned in May that the financial crisis in Europe, which consumes 25% of South Africa’s exports, poses large risks. Adverse effects on South Africa could have severe consequences for neighbouring economies.

Another worry is the resurgence of political crises. Due to the so called Arab Spring, economic growth in North Africa plummeted to just 0.5% in 2011. Recent coups in Mali and Guinea-Bissau could have wider economic repercussions. “Mali was scoring very well, now we are back to square one,” says Mthuli Ncube, the AfDB’s chief economist. Ethiopia, Kenya, Uganda and other countries have militarily engaged in Somalia, which may slow their economies. And Nigeria is grappling with Boko Haram, a terrorist sect in the north of that country.

A cause for concern what many are referring to as Africa’s “jobless recovery.” Investors are concentrating on the extractive sector, specifically gold and diamonds, as well as oil, which generates fewer employment opportunities. 60% of Africa’s unemployed are aged 15 to 24 and about half are women. In May, UNDP raised an alarm over food insecurity in sub-Saharan Africa, a quarter of whose 860 million people are undernourished.

But none of this is deterring South African business interest north of the border. One may ask why? South Africa’s domestic market is not providing local companies with enough growth opportunities, prompting many of them to look at the rest of the continent. This according to Ernst & Young’s Africa Business Centre’s leader, Michael Lalor in an online press conference recently: “While South Africa is still growing well compared to the advanced economies, it’s certainly not keeping up with some of the other rapid-growth markets.” Says Lalor.

Analysts are pointing out that many of the other emerging markets, such as China and South America, are difficult to enter, making the rest of Africa the obvious choice. Asia is seen as almost excessively competitive. Latin America ventures mean dealing with a very strong and ever present Brazil. Therefore Africa, given its sustainable growth story and its potential, is an obvious region for South African companies to grow into.

Quoted by howemadeitinafica.com Lalor says that most Johannesburg Stock Exchange-listed companies are currently developing strategies for the rest of the continent.   Ernst & Young is experiencing strong interest from foreign companies to invest in the continent. “The response from our clients and from potential investors is overwhelmingly positive, to the extent that we simply cannot keep up. So there’s no doubt that we are seeing significant interest, both spoken, interest in spirit, but also people putting their money where their mouths are,” he said.

These sentiments are confirmed by a survey done last year by Price Waterhouse Coopers. A CEO survey published by PwC found that 94% of South African company heads expect their business in Africa to grow in the next 12 months. PwC interviewed 32 South African CEOs in the ICT, financial services, and consumer and industrial products and services industries.

With this in mind it’s worth turning to Raymond Booyse, founder of consultancy firm Expand into Africa, who identified four mistakes often made by South African companies venturing into the rest of the continent.

The first was: Not doing your homework. South African firms are frequently not prepared to spend money on market research. “Go and look if there is a market for your products or services. After you’ve established that there is indeed a market, find out who your competitors will be,” says Booyse.

Booyse points out that South African companies underestimate transport costs and ignore how local laws and regulations influence doing business.

Secondly: Ignorance. Many South African business people are ignorant of local cultures and attitudes according to Booyse. By way of example, ignorance doesn’t realise that just because they’re both former Portuguese colonies, what works in Angola’s capital Luanda, doesn’t necessarily mean it will work in the northern Mozambique. In a recent report, research firm Nielsen noted that African consumers’ attitudes towards technology, fashion and how to spend leisure time vary greatly. No prizes for that one.

Thirdly: Arrogance. Booyse says that South Africans sometimes think they know what people in the rest of the continent need. “In the rest of Africa, South Africans are often regarded as arrogant.”

Finally: Not being prepared for the high costs of doing business in Africa. Many South African companies are not aware of the high costs involved in doing business in the rest of the continent. “If you want to spend two weeks in Angola it will cost you R40,000 (US$4,700),” notes Booyse. “It is not cheap and easy.” Flights for example, from South Africa to either Kinshasa or Lubumbashi can be costly, and hotel rates are also very high.

It’s clear that Africa is a fertile place to plant seed. But Africa is not for the faint-hearted as business is done in a very different way to elsewhere in the world, with all manner of social and political hoops to jump through. South African companies have a potentially bright future and definite advantages if they are prepared to take risks, stay humble and do their homework.

Auctioneering in South Africa, still has one foot in the mud.

Auctioneering in South Africa is bobbing like a cork in a sea of suspicion. Let’s take  a quick look at Rael Levitt’s confession, a raid by the Hawks, a subsequent application with the Western Cape High Court; South African Institute of Auctioneers (SAIA) submits a code of conduct and is there a conflict of interest with qualifications and Tirhani Mabunda?

Rael Levitt – the confession

Rael Levitt, courtesy IOL

Rael Levitt resigned his position as CEO of Auction Alliance in February upon being accused of paying dummy bidders to hike up prices during auctions. He has confessed to using Auction Alliance employee Deon Leygonie to hike up the bidding price at the Quoin Rock estate auction in Stellenbosch in December last year.

Astonishingly Levitt says he was unaware that what he was doing was against the rules.  He clarified that it was only when bidder Wendy Appelbaum became suspicious as to whether Leygonie was a genuine bidder, questioning how above-board the process was, that Levitt chose to read the rules and discovered that it was a forbidden practice. Leygonie never actually made any real bids, he was used to push up the bid from Appelbaum’s R35 million to R55 million.

In his confession Levitt divulges that after the Auction he met with friend, Israeli businessman Ariel Gerbi who then agreed to be registered as a bidder, making it appear as if the Auction Alliance employee had been bidding on his behalf.

{Source: Eyewitness News}

The Hawks, a Raid and Court Order

The Hawks are investigating: Fraud, money laundering, and a failure to keep accurate records of business, or wilfully destroying them in their swoop on Auction Alliance House. The Hawks are also tabling the movements, travel arrangements and appointments of Rael Levitt as far back as 1993.

The Raids were conducted in early August at Auction Alliance offices in the Cape Town CBD, Levitt’s residence, the offices of accounting firm Accountants@Law, and at auditing firm KPMG. Documents included Levitt’s diaries, Credit Card receipts and other documents. Other items included any financial records “of whatsoever nature”, including records of foreign bank accounts and tax returns with a bearing on the investigation.

Auction Alliance has however launched an application with the Western Cape High Court against the Minister of Police and a Cape Town magistrate to challenge the constitutionality of search warrants authorising recent police raids. In an affidavit before court, Levitt argued most of the offences listed in the annexures did not clearly specify who was suspected.

In a two pronged approach the application firstly brought an interdict to prevent the police from viewing material seized, and a second to challenge the constitutionality of the search warrants issued. This brought pressure to bear as parties reached a settlement.

In terms of the settlement, made an order of court by Acting Judge Rob Stelzner, the police undertook to return the seized items.

The lawyers must retain the items in sealed exhibit bags until September 7, or until determination of any application for a subpoena or search warrant brought before that date. The minister has undertaken to write a “without prejudice” proposal to Auction Alliance and Levitt on how police propose to be given access to the material seized.

 Code of Conduct

In the wake of the Auction Alliance scandal, the South African Institute of Auctioneers (SAIA) has proposed a code of conduct for the auction industry. This is reported as having been widely welcomed by practising auctioneers saying new entry requirements will help regulate and stabilise the industry. The draft will first be submitted to the public consultation process to be accredited by the Department of Trade and Industry.

Moneyweb spoke to Mark Kleynhans, director of Aucor Property who has also welcomed the SAIA proposal: “Aucor Property is in support of processes and procedures that bring credibility and transparency to the auction industry and we believe that a fair and consultative course of action in order to draft an all-encompassing code of conduct is required.”

However realtor Lew Geffen believes the proposal is only an attempt at damage control due to the lack of faith the public has in the auction process. Geffen believes a statutory code is what’s really needed to deal with ghost bidding or any other dodgy practices exposed of late.

Another sentiment that has emerged is a sympathy with the what is believed to be the majority of auctioneers who are credited by many in the property business as ethical and who put clients’ interests first.

Conflict of Interest

Tirhani Mabunda, courtesy IOL

Just when you thought it was safe. Tirhani Mabunda, the chair of SAIA who is also owner of the African Training Academy and School of Auctioneering (ATASA) is accused of having a conflict of interest.

SAIA’s draft code of conduct for the industry involves entry-level qualifications for all new recruits into the sector. Those currently practising as auctioneers will need to be evaluated and if they are considered unqualified, they will have to enrol for the NQF4 and NQF5 courses as well. 60% of practicing auctioneers are considered to be in such a position according to SAIA.

The year long course for candidates to get up to speed is accredited by the South African Qualifications Authority (Saqa). Who has the accreditation: none other than, Tirhani Mabunda, and his African Training Academy and School of Auctioneering (ATASA).

When asked the obvious question by Moneyweb about a conflict of interest Mabunda said he started ATASA in May 2008 but it was only registered as a company in 2009. He became chair of SAIA in 2010. At that stage the academy mainly offered courses for estate agents. Mabunda said he started compiling the curriculum for the auctioneering course in 2009 and it was subsequently accredited by Saqa and the SETA in 2010.

With the Auction Alliance scandal came new and panicked calls for the industry to be regulated. Mabunda described to Moneyweb, allegations that his school stood to gain from the proposed code of conduct and the entry level exam as “disingenuous”.

Of course one point is that ATASA may be the only institution providing the required training currently but this does not preclude any other industry players offering the same accredited courses.

In the end the matter is perhaps more one of perception than anything else but some say that perception is everything.

It seems the auction industry is far from being out of the woods with regards to any ambitions it may have, to appear above-board and worthy of trust.

Namibian Property Market – Open for Business

Namibia is the 15th largest country in Africa with a population of just over two million people; this makes it the second least densely populated country in the world after Mongolia. With a per capita GDP of $7363.00 (7th in Africa) one would think the population isn’t doing too badly, however, given that approximately half the population live below the international poverty line of U.S.$1.25 a day, that picture alters.

The country’s Gini coefficient (list of countries by income equality) is 70.7 the highest in the world followed by South Africa. That means with the disparity of wealth in Namibia comes property markets poles apart from one another. Median house prices vary from N$ 317 000 for a small property in the south, N$ 510 000 for a medium sized property in the north to N$ 1 100 000 for a large property at the coast. (N$ pegged to ZAR)

Paul Kruger of Pam Golding Namibia, says that currently the residential market segment with the most activity is represented in the price range of N$ 450 000 to N$ 1.6 million. As prices increase, activity dissipates and the market segment with the least activity is in the price range above N$3.5 million, although activity in this segment remains vibrant. Sectional title units is a popular local investment with an average price between N$ 750 000 and N$ 1 800 000 for two to three bedroom units which generally offers a rental return between N$ 7 500 and N$ 13 000 per month.

Windhoek CBD

However there is a trend in the development of lifestyle estates in the residential market and turnkey products for clients in the retail and commercial sectors. Further evidence of this is the development of two new mixed use facilities (residential, commercial and industrial), one in Windhoek and another in Swakopmund, with the first two regional shopping centres as the core focus of these projects.”

Many South Africa’s may have out-dated perceptions of Namibia, perhaps going back to the South West Africa days. Things have changed somewhat in the major centres, for example there are sophisticated shopping malls in most of Namibia retail centres.

The Maerua Mall

The Maerua Mall is a shopping complex in Windhoek. Expanded to more than double its original size in 2006, Maerua Mall is now the largest shopping mall in Namibia and contains a number of retail outlets, including Ackermans, @home, FNB, and Total Sports. It is the only mall in Namibia which contains a cinema and a Virgin Active gym. Maerua has the usual fast-food/convenience restaurants including Spur, Wimpy, Mugg & Bean and Dulce Cafe.

Wernhil Park with a facelift -artist’s impression

The Wernhil Park Mall is also in Windhoek. It is named after the first names of Werner and Hildegard List, the senior stockholders of the Ohlthaver and List Group of Companies who owns the facility. It is the second largest mall in Namibia. Along with Maerua Park Mall, the two malls are the largest formal shopping venues in Namibia.

From an infrastructure point of view, things are on the move with the upgrading of airports for example.

The Namibia Airports Company (NAC) is investing R1, 2-billion on airport upgrades over the next five years, which will allow any-sized aircraft, including super jumbo jets, to land at the country’s two main airports. The State-owned enterprise said that the envisaged improvements would also enable it to offer around-the-clock service at the Hosea Kutako International Airport (HKIA) and the Walvis Bay airport.

Windhoek International Airport

NAC is spending R120-million on runway rehabilitation at HKIA, which is located 45 km outside Windhoek. This is its biggest undertaking since its inception, and is financed partly by the Namibian Ministry of Works and Transport. NAC also plans to build a new passenger arrivals terminal, an office block and a head office at HKIA.

At the Walvis Bay airport, NAC is expanding the terminal and refurbishing the old taxiway and apron at a cost of about R37-million. The increased terminal capacity would boost passenger movement from 50 passengers an hour to 250 passengers an hour, paired with increased retail offerings.

Walvisbay

“The Walvis Bay fishing export industry will also benefit greatly from this expansion as traffic will return to the area, resulting in lower transport costs of particularly fish exports to international markets,” the company has reported.

Plans to increase safety and security have also been undertaken at Windhoek’s smaller Eros airport and the Lüderitz airport.

Improved infrastructure is showing the political will to improve the investment prospects of Namibia commercial centres. Clearly the intention is of attracting investors, among other reasons. Looking more specifically at property: despite the property market showing an annual growth of 20-25 per cent over the last few years, the banks have increased their lending criteria.

Mother bonds are available to property developers after securing 80 per cent pre-sales on developments.  Other financial institutions like Old Mutual invest in and fund commercial and residential property developments in Namibia, while alternative funding is available through various institutions like the Government Institutions Pension Fund (GIPF) to finance targeted property development projects.

In the words of Pam Golding’s Paul Kruger: “The potential for growth in the real estate sector in Namibia seems endless. One area with exceptional growth potential is property developed for the low to medium income bracket in Namibia.  At the current rate at which Namibia is addressing structural supply shortages, it will take at least another 720 years for the country to exhaust all available municipal land.”

Since August 2011, municipal areas across the country were found to hold a capacity of 3.6 million houses, 1.6 million of which would fit into Windhoek and its recently extended boundaries. Currently, Windhoek accommodates over eighty thousand houses, whilst the present population growth requires the mortgaging of approximately 300 stands per month. On average only five stands are mortgaged monthly.

Paul Kruger says while these figures accentuate the demand for low to medium cost housing they also indicate the need for housing as well as infrastructure across all sectors. Further demand and growth is expected with the anticipated growth in the mining and resources sectors as the mining of uranium and oil reserves occurs.

Swakopmund Schuller Strasse

Namibia’s three major centres being Windhoek, Swakopmund and Walvis Bay are the hot spots in the residential market according to Kruger. There is also a recovery in development in some smaller towns like Tsumeb, Otjiwarongo and Omaruru

Agricultural land is also in high demand, in particular game farms, as well as farms suitable for livestock and irrigation. On the commercial front Windhoek, Swakopmund, and Walvis Bay are the focus of developments. There is also much investment in Oshakati and Ondangwa.

New retail developments in Keetmanshoop in the south and Otjiwarongo in the north funded by GIPF (Government Institutions Pension Fund) will undoubtedly contribute to growth in these areas.   Industrially, both Windhoek as a growing capital city and Walvis Bay as the main port with planned upgrade and expansion to its container terminal offer various industrial investment and development opportunities.

The Grove

An arresting development on the retail front is the new Grove shopping centre in Windhoek. Upon completion it will be Namibia’s largest. The mall is situated within the Hilltop mixed use estate next to Tradecentre in Kleine Kuppe, Windhoek. Kleine Kuppe and surrounds is currently the fastest growing node in Windhoek and the area enjoys the most convenient access from almost all suburbs. The Grove with a total development cost of N$1.1 billion is the largest commercial property investment ever within the borders of Namibia.

“From a commercial perspective Windhoek is experiencing a boom in the commercial (office) sector, with various investment and development opportunities. With a growing economy, stable and sound political environment, well developed and maintained infrastructure, sound fiscal and legal framework there are good reasons to invest in property in Namibia,” says Paul Kruger.

Doing business in Namibia, according to the World Bank’s International Finance Corp, is at rank 74 (SA is 35) down 4 spots since 2011. Getting credit is ranked 24, (SA has a number 1 rank) registering property is 145 while South Africa is at 76. So although not at the same level as South Africa, the rankings are fair as far as Africa goes.

Price Waterhouse Coopers official line on Namibia is encouraging: “This African jewel is a growing hub of business opportunity, with a wealth of land-based resources shows considerable growth prospects in the Tourism, Mining and Agricultural sectors. With the Namibian business environment firmly supported by the Ministry of Trade and Industry, investors can look out for: An open government attitude towards foreign direct investment. Government policy that supports free enterprise. A sophisticated banking system and a multitude of business opportunities.”

And who can argue with that.

 

 

 

Africa is the Next Big thing

Investment into Africa as the next big thing seems to be all but established. But investment into property developments has been stop start, with some notable exceptions. Experts on the ground are expecting investment to pick up as Africa’s hunger for shopping malls and commercial office space continues to grow.

Many retailers that have set up operations in Africa have expressed that their expansion on the continent is being held back by the lack of suitable shopping malls. This begs the question that if there is such a strong demand for modern retail locations, why aren’t we seeing new malls being developed at a more rapid pace?

There are some worthy exceptions: South Africa’s Manto Investment Group is to construct a US$30 million shopping centre in Ndola, Zambia. Construction work is expected to commence after feasibility studies have been completed.

West property, Augur Investments and McCormick Property Development, are planning the building of a 68, 000sqm shopping mall in Zimbabwe located in Harare’s up market Borrowdale suburb. According to The Zimbabwean online (UK), this represents the biggest shopping mall in Africa, outside South Africa.

The Financial Mail reports that Resilient Property Income Fund Ltd plans to spend more than 1 billion rand building 10 shopping malls in Nigeria.  The malls, 10,000 square meters and 15,000 square meters in size, will be built over the next three years in the capital, Abuja, and the city of Lagos respectively, the main commercial hubs. Shoprite, Africa’s largest food retailer, will be the major tenant. Bloomberg reports that Standard Bank Group Ltd, Africa’s biggest lender, and construction company Group Five Ltd. (GRF) are also partners in the deal.

Recently, emerging markets private equity firm Actis has been at the forefront of a number of Africa’s more high-profile property developments. The company is behind Nigeria’s arguably first modern shopping malls and has recently announced that it will invest in East Africa’s largest retail mall to be situated in Nairobi.

How we made it in Africa asked Kevin Teeroovengadum, a director for real estate at Actis why we aren’t seeing new malls being developed at a more rapid pace. Teeroovengadum believes there hasn’t been significant enough interest from international property developers to invest in sub-Saharan Africa. South African developers were focused on the local market due to the football World Cup, while European firms were concentrating on Europe and the Middle East. However, the recession in Europe has prompted some European real estate companies to look at Africa for growth opportunities. Post-2010 many South African property players have also turned their attention to the rest of the continent.

Something that players in the industry point out is that the development of shopping malls is time consuming. This referring to the red tape involved with dealing with multiple countries, different regulations and laws and political interference.

Teeroovengadum said. “But if I look at today, and compare it with five years ago, there are far more players involved in the real estate sector. We can really see that happening on the ground. I think if we fast-forward two or three years from now, you are going to see more shopping centres being built in places like Ghana, Nigeria and Kenya – the big economies. You are going to see a fast-tracking of property development happening in Africa.”

Africa south of the Sahara, not including South Africa, has a little in the way of  the modern shopping mall experience. Most shoppers still have to frequent a variety of places for their shopping requirements.

However, there appears to be an inclination towards convenience where a variety of products can be found in one location. “Clearly we are seeing in all the markets where we have invested a type of evolution of people moving from informal to formal shopping centres.” Says Teeroovengadum.

One of the challenges continues to be access to funds for property developments in much of sub-Saharan Africa. With the exception of many of South African developments that are funded with up to 100% debt, the rest of the continent developers often need to put down around 50% in cash.  Currently there are few banks that are willing to lend for 10 to 15 years. However it is reported that this is improving, as markets become stronger, local banks become stronger, and changes are occurring in markets like Ghana, Zambia and Nigeria in this regard.

Although Africa is drawing the attention of increasingly greater numbers of international investors, interest in the property sector remains relatively passive.  On a macro level, more investors are looking to invest in Africa.  Barely a week goes by that one doesn’t see an article about Africa, and its growth opportunities and increased foreign direct investment.

However when it comes to property it is a different situation says Teeroovengadum. He refers to the number of investors who made poor returns over the last decade due to the asset bubbles in the US, Europe and Middle East. They are very hesitant about investing more into property. Those who are willing are typically development finance institutions, those institutions that have long-term money for Africa. There are a couple of international pension funds who are looking at investing in Africa, but there are very few these days.

When the question was posed to Actis directors about how they decide which African countries to invest, in they replied that at a basic level they look for a ‘strong economy’ like Nigeria, Ghana Kenya, Uganda and Zambia. This indicates that these countries have good fundamentals, a large population, GDP growth and increasing GDP per capita etc. A Strong legal system was also referred to.

Africa wants shopping malls and companies like Resilient and Actis are gearing up to deliver.

Africa is not an island and is subject to the ebbs and flows of the world economy and its whims and fancies. Nevertheless for whatever reasons Africa is emerging as the next big thing in world investment and economic growth. But is the time right while the world is reeling from financial crisis upon financial crisis. Time will tell if those who were brave enough were foolish or wise.

South African Shopping Centres Continue to Flourish

Shop ’til you drop – Google Image

“I always say shopping is cheaper than a psychiatrist.” Tammy Faye Bakker

It could be that shoppers are gradually showing an inclination and increasing ability to manage their debt.  Benefiting from the declining interest rates may also be a driving force. Regardless, shopping malls continue to demonstrate a suppleness in the face of pressures like increased fuel prices, electricity hikes and municipal rates increases.

Despite discretionary spending being under pressure, the retail categories of household goods, textiles, pharmaceutical and clothing remain well supported, said Johan Engelbrecht, director retail management for JHI Properties to Denise Mhlanga of Property24.com recently.

It seems that retail nodes where there is a sustainable flow of consumers, sales are performing well. Retail sales turnover for centres run by JHI for example report increases on average of seven per cent over the past year.

South African Shopping Centres Continue to Flourish.

JHI has renewed capital investment with the extension of Greenstone Shopping Centre near Edenvale. The shopping centre opened its new extension in December 2011 with fully let space of nearly 6 400 square metres. A new Edgars has dominated the launch and has been a great success with shoppers.

Rather than hold back or wait and see, JHI Properties intends to advance its retail business unit over the next few years and increase its portfolio of managed retail centres, including elsewhere in Africa. A revamp of the Kolonnade Mall in Montana, Pretoria North is on the cards for example.

Engelbrecht revealed that JHI has opened an office in East London since they intend to invest in an area of great expansion which stretches from Mthatha to Port Elizabeth.

The Cavaleros Group, that brought us Sheffield Business Park has made some significant investments into shopping malls of late. The property investment company spent R20 million making over Bedfordview’s  Village View shopping centre. The intention has been to keep the centre fresh and relevant, vital in the world of competing shopping centres. Apart from the overall refurbishment, three new restaurants plus a Steers and Nandos will enhance the dining appeal of the centre.

Village View in Bedford View – Cavaleros Group

Across the way in Norwood, Cavaleros Group owns the Norwood Mall. The mall sees some major reconfiguration taking place this year. An 1 800sqm Food Lover’s Market has been added to the upmarket retail mix. In the interest of improved flows and greater variety Mr Price Home, Rage, Crazy Store, Bata and Step Ahead are trading from new stores. Food Lover’s Market will open in August joining Norwood Mall’s collection of anchor tenants: Woolworths, Dis-Chem and Pick n Pay.

160 retail centres were developed nationally and are flourishing in townships and rural areas of South Africa between 1962 and 2009, covering about 2 million square metres of retail floor space and generating about R34 billion worth of business sales with an added 54 300 permanent jobs to the national economy since the 1980s.

In rural areas there are other dynamics involved. Rural shopping centres these days are benefiting from the Government social grants. South African Property Owners Association (Sapoa) report revealed that consumer spending is up 30 per cent in the last four years.  Naturally new shopping malls need to be strategically placed in order to avoid overtraded areas.

Marc Wainer of Redefine Properties says “I believe this is an ideal time to develop since interest rates and building prices are at very competitive levels.” He warns that this will not last indefinitely as contractor order books will start to fill up.

Elim Mall – Twin City Developments

With this in mind no doubt, Twin City Developments is developing a new community shopping centre, Elim Mall in Limpopo at a cost of R202 million. Twin City Development owns retail developments like Blue Haze Mall in Hazyview, Twin City Mall in Burgersfort and Twin City Mall Bushbuckridge. Phase one of Elim is to launch by April 2013 with nearly 50 shops.

More than 80% of shoppers within the centre’s catchment area currently shop in other towns. They will now have the convenience of a shopping centre within reach of their own community.

Nedbank is financing the development to the tune of R175 million. The gross lettable area (GLA) is 18 627 square meters with Shoprite as main anchor with a 3500 square meter store accompanied by a 2300 square meter Boxer store. Other features include a KFC drivethrough, an Engin garage and a 72 bay taxi rank.

Clearly Twin City has looked well into the future having purchased the adjacent land enabling it to extend up to 4500 square meters of GLA.

Also eyeing non metropolitan areas for investment is the Dipula Income Fund who already own the Blouberg and Nquthu Plazas which continue to flourish. The JSE listed company is investing R330 million into three shopping centres as it intends to advance its portfolio exposure to low-income households and spread its geographic base. The three malls are: the 6 000 square metre Randfontein Station Shopping Centre in Gauteng, the 14.700 square metre Bushbuckridge Shopping Centre in Mpumalanga and the Plaza Shopping Centre in Phuthaditjhaba in the Free State.

The purchases will raise Dipula’s portfolio to 181 properties with a total GLA of over half a million square meters. Retail property makes up 57% of the portfolio.

Endaweni in Diepsloot Extension

Investec Property plans to develop the 25 000 square metre new regional shopping centre to be known as Endaweni in Diepsloot Extension 10 at a cost of approximately R275 million. Endaweni Shopping Centre will be one of two centres, which will serve Diepsloot and its surrounding communities. Endaweni will link retailers directly to a community of about 150 000 people. The plan of the centre is such that it not only contains a range of national tenants but also accommodates a large quantity of restaurants, which are expected to be a major draw-card for the local communities. The mall is due to open in September 2013.

In November this year Limpopo’s Lephalale Mall’s first phase is due to open. Lephalale Mall is located at the corners of the main arterial Nelson Mandela Road, Apiesdoorn Avenue and Onverwacht Road, on the western edge of Onverwacht’s new CBD in a major residential growth node. It will serve residents of the established Ellisras town, Maropong and the surrounding areas.

Medupi Power Station Lephalale

The Lephalale Mall is a joint venture between Moolman Group and Uniqon (Pty) Ltd. The mall and surrounding node will ultimately consist of 70 000 square metres of retail and other commercial space once fully developed. The growing coal mining and power generating activities in the area are the driving forces behind Lephalale’s growing economy. The Waterberg Coal Field in Lephalale is one of the largest coal fields in South Africa. Lephalale Mall itself will be a catalyst in the area’s economic development, as it grows with its market, and attracts local spending.

The Moolman group was also party to a venture with Resilient Property and Flanagan & Gerard Property Development & Investment in Polokwane, Limpopo.  Another South African shopping centre destined to flourish,  The Mall of the North opened in April 2011. It recorded exceptional performance during its first year and continues to receive attention from retailers seeking to open stores at the mall. Driving its performance is its exciting retail mix of 180 shops with anchor retailers including Pick n Pay, Checkers, Edgars, Woolworths and Game, as well as a Ster-Kinekor cinema complex. Its tenant mix is constantly monitored against shopper trends.

Mall of the North won the South African Property Owners Association Innovative Excellence Award in Retail Property Development. It also won the prestigious Spectrum Retail Design Development Award from the South African Council of Shopping Centres.

Which brings us back to the city. Cape Town and surrounds in particular. Few new malls have been built of late but there is much upgrading and refurbishment.  N1 City, Tyger Valley Centre, The Blue Route Mall, Cavendish Square,  Somerset Mall, Canal Walk and the Promenade in Mitchells Plain have expanded or been given multimillion-rand upgrades.

Tokai’s Blue Route Mall

Work on Tokai’s Blue Route Mall will be completed in October at a cost of R83m. The upgrade expands the centre by 8 000m2 to 56 500m2. Upgrade construction on the northern suburbs’ 25-year-old Tyger Valley Centre started last March. The centre is being extended by 8 000m2 to 90 000m2 at a cost of R450 million.

Some analysts are suggesting that the market is marking time, that there is a consolidation in the retail property sector. However refurbishments and expansions continue and nothing seems to be stopping shopping malls opening and flourishing in rural areas. So either there’s still lot of people out there with money to spend or, in the words of Tori Spelling: “Bad shopping habits die hard.”

Johannesburg Inner city Renewal – Latest

Johannesburg’s inner city and surrounds continue to show signs of regeneration. Slowly but surely the streets really are being taken back.

BG Alexander in the inner city restored and managed by Joshco

Johannesburg inner city has nearly a quarter of a million residents living in approximately forty thousand units. Twelve per cent are in the R15 000 a month income bracket; eighty per cent earn R1500.00 or more. As many as 20% of inner-city residents are university graduates and 35% of these have technicon diplomas.

According to a survey by Trafalgar Property & Financial Services: the reasons given for choosing the inner city in which to live included affordability (22 per cent), proximity to work (11 per cent) and proximity to schools (11 per cent).

The goal of the Metro’s Inner City Regeneration Strategy is to raise and sustain private investment in the inner city, leading to a rise in property values.  One strategy is “discouraging sinkholes”, meaning, properties that are abandoned, overcrowded or poorly maintained, and which in turn “pull down” the value of entire city blocks by discouraging investment. There are two names that are certainly discouraging sinkholes in the inner-city and that’s Joshco and TUHF.

Pontebello in Hillbrow refurbishment funded by TUHF

The Johannesburg Social Housing Company (Joshco) was established in 2004 by the City of Johannesburg to provide affordable rental housing to the lower income market and to help eradicate the housing backlog.  At present, it manages more than 5 000 affordable rental accommodation units and has reduced default on payments from 87 per cent to only 6 per cent since it started operating in 2006.

In 2010 Joshco received the United Nations’ 2010 Scroll of Honour award for its holistic approach to providing shelter. It is the world’s most prestigious human settlement award; it recognises initiatives that have made outstanding contributions in various fields such as shelter provision, highlighting the plight of homelessness, and leadership in post-conflict reconstruction.

Joshco only provides rental accommodation to residents in the lower income bracket, and tenants can’t claim ownership or don’t become the legal owners of the property they’ve rented for a number of years.

The company intends expanding its housing portfolio to more than 10 000 units by June. Its aim is to develop over 11 000 housing units in Johannesburg. It currently manages about 7 600 rental units, of these, only 930 are instalment sale for ownership.

Recently eight buildings in derelict areas in the inner city have been refurbished by Joshco. Areas include: the CBD, Berea, Joubert Park, Hillbrow and New Doornfontein. These building were previously occupied by criminals and squatters.

The buildings were completely gutted and transformed into affordable communal accommodation. Rent is from as low as around R600 a month.

Casa Mia refurbished Hillbrow building by Joshco

In an interview with the Star Joshco chief executive Rory Gallocher said: “Years ago the only thing property owners wanted to talk about was selling up and getting out. However, things have changed. On the occasions that we have been in the market to buy property in the inner city, we have experienced difficulty finding buildings that are priced at a level that would allow it to work for our market because of high demand.”

The vision for individual buildings is “order and liveability” to replace “chaos and discomfort” through basic management. Joshco says it believes in proper management of buildings by implementing a well-informed and factually accurate plan, where rules are clearly stipulated.

Joshco is very mindful of the fact that inner-city residents are not middle or high income salaried people. A substantial amount are in low-wage employment and who are self-employed, either trading or doing domestic work. Many are small entrepreneurs whose activities function because of their location.

Gallocher believes that good management of buildings will attract business to the inner-city. The latest buildings are Casa Mia in Hillbrow, once a degraded residential hotel that was invaded; The Chelsea in Hillbrow; MBV in Joubert Park; La Rosabel in Hillbrow; Raschers in Loveday Street; Selby and Europa House in the CBD; and Lynatex in New Doornfontein, which is used for temporary, emergency accommodation.

On a slightly different tack is Johannesburg urban renewal property group TUHF (Pty) Ltd. TUHF provides commercial property finance to emerging and established entrepreneurs to buy and refurbish affordable rental housing residential buildings in the inner cities of Gauteng, Durban, Pietermaritzburg and Port Elizabeth.

TUHF is making a significant contribution to the purging of dereliction in the inner-city and the development of housing that is affordable and secure. So far TUHF’s footprint is R125m in equity investments.

TUHF has assisted entrepreneurs through financing and business support to purchase and refurbish 490 derelict buildings over the past nine years. The focus is on quality rather than quantity deals, to minimise the risk of bad debt.

Monis Mansions refurbishment funded by TUHF

The company has attracted equity investments from large and well respected organisations, namely the Public Investment Corporation (PIC) and the National Housing Finance Corporation (NHFC).  The NHFC’s current investment is a debt equity conversion of R75 million converting R40 million for 20% of B shares and R35 million for preference shares in TUHF.

Futuregrowth’s Development Equity Fund, on behalf of its clients, has acquired a 12.5 per cent equity stake in TUHF. TUHF, together with its investors, foresee an increase in investment in inner cities, and the stimulation of business which will lure companies to return, expecting a boon for the restaurant trade as well as eventually inspiring leading chains to scout out the area as well.

Futuregrowth was the first institutional investment manager to provide TUHF with a loan facility that has increased from R50m to R350m in a five year period. The Development Equity Fund is part of Futuregrowth’s suite of socially responsible investments.

TUHF previous success stories include: Pontebello in Hillbrow; Monis Mansions in Johannesburg’s CBD; Allenby Court in Highlands; Hollywood Heights in Hillbrow; Waverley Court in Hillbrow and Avon House in the Fashion District of Johannesburg. Most recently Dolphin Court, in Joubert Park was revamped with funding from TUHF.

Joshco and TUHF are making huge contributions to inner-city renewal in completely different ways. In essence their work is complimentary and supplementary in a diversity that tackles renewal in overlapping housing/accommodation markets. With such confidence in mind the residential market in the inner city seems unexpectedly rosy given the slowness of the economy.  One can’t help wondering how long it will take for the big banks to wake up and catch on.

On your marks, get set…Africa! SA Business moves into Africa.

On your marks, get set…Africa!

In the face of declining world markets and the lack of prospects in the West, Africa is looking more and more like a place to do business.

Africa, with all its angst and chaotic history and struggle with social upheaval is showing a resilience and sense of survival at which we can marvel.

The International Monetary Fund anticipates emerging economies in general and Africa in particular will expand by 4.5% this year and 4.8% in 2013. An interesting indicator has been residential property values, which, on average, rose by 8% in 2011. (AFDB Statistics)  Economic growth is expected to continue despite recessionary trends in some parts of the world.

Although income disparities exist across Africa an authentic middle class is evolving. It is estimated that sixty million African households have annual incomes greater than $3,000 at market exchange rates. By 2015, that number is expected to reach a hundred million.

Urbanisation is pushing up demand for all kinds of real estate:  office space, retail complexes and of course, housing. The growth of, and potential for, infrastructure projects abounds. This has the positive spins off for labour too.

South African business, it could be said, is scrambling. Recently Resilient, known for its successful serial development of non-metropolitan shopping malls outside of the major urban nodes, expressed dissatisfaction with local red tape and revealed it would spend more than 1 billion rand building 10 shopping malls in Nigeria.  The malls, 10,000 square meters and 15,000 square meters in size, will be built over the next three years in the capital, Abuja, and the city of Lagos respectively, the main commercial hubs. Shoprite, Africa’s largest food retailer, will be the major tenant.

Wal-Mart-owned Massmart last month said it would invest in African growth and hoped to grow its food retail business from about R7bn to about R20bn over the next five years. But it’s South African food retailers Shoprite and Pick n’ Pay’s whose sites are firmly set on Africa. Pick n Pay has increased its African growth, using R1,4bn from the sale of Franklins in Australia.

Shoprite, which has only about 123 stores in Africa compared to about 1730 locally, says another 174 stores will be added in Africa next year.  Pick n’ Pay on the other hand is aiming to expand into Malawi and the DRC within the year. The food retailer has over 93 stores in Africa North of South Africa. Zambia and Zimbabwe are on the cards for expansion. Woolworth, not to be outdone has opened 14 stores through its Enterprise Development Programme  in Nigeria, Uganda, Zambia, Kenya, Mauritius, Tanzania and Mozambique. Woolworths currently has a presence in 12 countries with nearly 60 stores across Africa, excluding South Africa.

Further investment in the African playing field could come in the form of buy-outs of South African food retailers by the likes of Tesco, Carrefour and Metro. Wal-Mart’s consumption of Massmart has already been well publicised.

On a slightly different tack, Don’t Waste Services (DWS), the largest on-site waste management company in South Africa, has publicized their intention to open affiliates in Botswana, Kenya, Zambia, Mauritius and Swaziland. The company – is active in the mining, retail, hospitality, healthcare and large industry markets and currently provides waste minimisation services to 300 corporate clients across their portfolios of sites. Having recently expanded into Mauritius, the company is keen to duplicate their successful model in other African countries.

On the real estate front JHI Properties Zimbabwe has added another 15 properties to its portfolio of over 50 since it is to manage unlisted property investment fund, Ascendant Property Fund (APF). JHI has already expanded from its South African home base into Zambia, Ghana, Namibia, Botswana, Lesotho and Nigeria. This further expansion comes as Zimbabwe is experiencing exceptional growth in the retail market at a rate of some nine per cent plus year on year. APF CEO Kura Chihota anticipates actively pursuing growth in Zimbabwe. “With Zimbabwe’s anticipated economic growth rate of nine per cent per annum, prospects look promising.” said Chihota recently.

JHI Properties was also appointed as the leasing agents for Joina City, a new upmarket ‘urban city’ in Harare incorporating four floors of retail with 18 floors of offices. Anchor tenants include big South Africa names Spar and Edgars.

Bringing us to Bigan. Bigan, that brought us Mombela Stadium in Nelspruit, Olievehotbosch Ministerial housing projects, the Oliver Tambo International Pier Project and ESKOM Coal Hauleage Road Repair, is negotiating partnering with Ghanaian real estate companies to build affordable houses for the poor and middle income earners.

Ghana’s housing deficit stands at about 1.5 million units. Bigan believes it has the capacity to deliver and help reduce Ghana’s housing deficit. Based on their experience in South Africa, Bigan’s Emmanuel Kere believes that the company can “support not only the (housing) sector in Ghana but infrastructure development in general.”

Bigan claims to build 30 000 houses in South Africa annually and has a lot to offer Ghanaian companies. Chairman of Bigen Africa, Dr Iraj Abedian said that the company was attracted to Ghana because of the country’s stable political environment and friendly business atmosphere. Bigan makes no apology that it intends to use Ghana as a springboard to launch operations into Senegal, Liberia, Nigeria and Sierra Leone.

The South African government is not exempt from taking an active role in the scramble for Africa either. The Public Investment Corporation (PIC), which manages over a trillion rand on behalf of civil servants, which accounts for 10% of SA’s JSE market capitalisation, is looking for potential private equity partners.  10% of the portfolio is to be invested outside South Africa, R50 billion is reserved for African investment.  60% of that, about R30 billion, will go to private equity according to PIC CEO Elias Masilela in an interview with Reuters. The PIC is likely to be a player in infrastructure investments as countries on the continent build and revamp their roads, dams, hospitals and power stations, he said.

Public Investment Corporation which has a presence in 18 African countries weighs in on infrastructure. In an interview with Goldman Sachs’s Hugo Scott-Gall, Sim Tshabalala deputy CEO of the Standard Bank Group said: “in most of sub-Saharan Africa infrastructure has all but collapsed, or is limited. It has to be rebuilt, so there are massive opportunities in project finance. A lot of infrastructure will be refurbished, mainly with support from the Brazilians and the Chinese. The link we have with ICBC (Industrial and Commercial Bank of China) also helps us identify opportunities and execute on them. In our case, ICBC is a 20% shareholder.”

Standard Bank, as a South African player in the African market has positioned itself well as a go between or conduit for other BRICs partners wanting to interface with the continent. Standard Bank has a cooperation agreement for example, to identify Chinese corporates and SOE (State owned enterprises) that are looking for opportunities on the continent.

Standard Bank has its work cut out for it as Intermediaries for foreign capital since it is estimated that Africa needs about US$90 billion a year to deal with its infrastructure backlog and currently is raising about US$70 billion. This is coming from a combination of sources: taxes, the banking system, and a large amounts coming from outside – risk capital. The banking system in individual African countries does not have the capacity to fund all of the necessary infrastructure activities, so there will be a lot of reliance on international capital markets and the international banking system.

Standard Bank is not alone in its growing presence in Africa, ABSA has received regulatory approval to start a greenfield insurance business in Zambia, bringing to four the number of sub-Saharan countries where the Barclays-owned bank will have insurance operations.  First National Bank (FNB) has revealed plans to invest nearly R2bn over the next 12 months as SA’s third-largest bank by customer numbers, to expand its footprint in SA and Africa. It is believed to be considering an acquisition in Nigeria and has sent scouting missions to Ghana. The bank, which operates in eight countries in Africa including SA, has about 7 -million customers in SA and 1,1-million in Africa. FNB Tanzania was its most recent addition, while its Zambian unit has already announced plans to have a nationwide branch network by 2016.

There’s no doubt that some South African companies are viewing Africa with a greater sense of urgency. The European Union’s financial troubles have revealed South Africa’s vulnerability to European troubles. More than 25% of South Africa’s bilateral trade is from the EU. If GDP in Europe declines that indicates fewer goods being shipped from Africa. This does not bode well for South Africa. Expansion and investment into Africa can broaden South Africa’s horizons not to mention its vulnerability.

But in the words of Standard Bank’s Sim Tshabalala: “As a South African I would love to believe in the sustainability of the country’s national competitive advantage as an entry point to the African continent. Increasingly, people are able to go directly to Kenya and Nigeria, for example, without going through South Africa, because these countries are building the necessary hard infrastructure and the required financial and legal infrastructure.”

So it seems that South Africa’s competitive advantage is diminishing as the rest of the continent develops. In the meantime many companies are seeing the gap and heading into the fray. It seems that the future really is now.

Are South African Hotel Rooms Oversupplied and Overpriced

The hospitality industry which boomed in South Africa in 2010 has admittedly had some post World Cup benefit. The industry has also shed some of its fly-by-nighters. However the debate continues as to whether hotel rooms are overpriced and over accommodated. Regardless, the question remains, aren’t hotels a property industry problem and therein lies the root dynamic behind the quantity and price of rooms.

Stepping back and looking at tourism in general we are reminded of what valuable foreign currency it brings into the country. The hospitality industry provides coveted direct employment too. The potential for growth is huge and its knock-on effect on the commercial property world worth taking seriously.

South African tourists, who make up the largest section of the market, have to bear the brunt of the high hotel room rates which are often aimed at the overseas tourist. Despite the belief that foreign tourists are ‘loaded’ there is some resistance to our higher room rates. By comparison Brazil, which is similar to South Africa in some respects, is geographically closer to most of the same source markets that we rely on for inbound visitors. Upscale hotels in the major cities of Rio de Janeiro and Sao Paulo reported average room rates of between $300 and $400. Although the South African equivalent is around $190 at current exchange rates, the difference can arguably be absorbed by the cost of travelling to South Africa, a destination which is generally regarded as a long-haul destination.

Here’s the rub: High room rates have the knock-on effect of an oversupplied market. Customarily this should lower daily room rates as a result of market forces of supply and demand. However what has been observed is a reduction in occupancy rates. In some parts of the world various solutions are formulated to deal with oversupply. On the other hand other governments have not interfered and left it to market forces. It is important from the outset to ascertain where this oversupply exists and to quantify its extent.

One intervention by hoteliers is to discount room rates. The down side to this is the unintended message that the value has decreased too. To then return to the higher rate becomes a negative movement. Another strategy, instead of dropping rates, is to add value, offering two-for-one deals where visitors get one night ‘free’ on top of the original booking, extras such as free bottles of wine with a dinner in the hotel restaurant or vouchers for various entertainment in the city are supplied.

Countering this there is the school of thought that sees this as only a temporary solution whilst hotels engage in a price war of undercutting rates. The visible nature of hotel rates means short-term occupancy gains are quickly offset as competitors rapidly follow suit in cutting rates. This leads to a lower priced hotel market yielding lower revenues in the face of normally unchanged demand, proving that rate discounting alone does not induce additional hotel demand.

Looking at the big picture, some would encourage government intervention for the tourism industry in general. A more competitive ZAR/dollar exchange rate will help make hotel rates more affordable for the inbound tourist market. The Department of Transport could relook at increasing the number of airport slots for international airlines. This would help bring more visitors  and bring down costs through competition.

One country whose government hasn’t been shy to intervene in the tourism industry is Ireland. A country very dependent on tourism. In the wake of the Global Financial Crisis Ireland’s NAMA (National Asset Management Agency)  took control of over a 100 hotels with the intention of circumventing bankruptcies of the operators through paying out the creditors and then removing the remaining stock from the market. As a result, competition in the market was reduced and room rates were stabilised for the entire market. Although the removal of competition is seldom seen as beneficial in a market economy, especially when taxpayers’ money is involved, such drastic action is a further indication of the seriousness of the hotel room oversupply problem and the extent to which some countries will go to protect their tourism industries.

Coming round to property, many would point out that hotels are, in essence, in the property industry, and construction costs are the capital outlay that hotel incomes and profits have to provide a return on. For the last decade, tender price escalation, as an indication of construction costs, has averaged 12%, indicating that hotel returns are diminishing.

One may argue that new investments in the hotel industry should only have been introduced into the market if the potential for the market was there to ultimately sustain the room rate. By 2008, most market commentators had already forecast the “property bubble” bursting. The SA Reserve Bank Governor issued warnings to businesses and consumers to reduce debt and to forgo acquiring more. Most hotels that entered the market without taking into consideration those warnings, perhaps should not have been built in the first place.

The higher-than-inflation building costs whilst South Africa is experiencing deflationary conditions are similarly to blame for the high average daily room rates. The materials, labour and overheads are also to be considered. Recently the rise in cost of materials has been much more than inflation and other building cost indicators. The largest construction companies were also recently investigated by the Competition Commission for anti-competitive behaviour. Some of them have come clean and have been penalised.

To quote Hotel commentator Makhudu in his online blog article: ‘Hotel Oversupply’: “For the investor, the opinions that room rates are greater than normal means that hotel properties are currently overvalued. Some bankers have gone further than conducting debt reviews. Instead of recalling loans they have on hotel properties they have gone and interfered with the market dynamics by unilaterally dropping rates. Established hoteliers have bitterly criticised the actions of so-called ‘zombie hotels’ which have been taken over by banks and are undercutting rates for the sector in general.”

Reading the market with the wisdom that many of the most experienced hoteliers have, acting with owners who resist the skittishness that has come upon many investors of late, decisions about room rates will hopefully be made with sober judgement and a steady hand. It makes little sense to kill the goose that lays the golden egg. We should cherish every tourist that comes our way and reward them with reasonable rates. History may just remember us according to how well we cared for our golden geese.

BMW Beats the Banks

Whilst the European crisis and it’s ripples to South Africa have got grey suited local bankers all in a Windsor knot, one motor finance company is putting its hand up making itself available for, what is believed in some circles, to be signs of better times ahead for residential property.

In a move that in itself may boost the whole house marketing sector, luxury car manufacturer, BMW, has made public its plan to move into the home finance sector. Actually BMW have been easing its way into this world for some time.  But now there is a drive to acquire a greater number of applications.

In pursuit of motive for the movement into the housing market BMW’s response has been a bold one.  BMW intends to counter what it considers to be extremely poor service by banks. It seems that banks are quivering in the face of implementing Basel III.

Basel III is the third of the Basel Accords. It was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis.

With the onerous requirements of Basel III on banks, one ought not to be surprised to see that non-bank players are becoming more prominent in the SA home loan market. We should expect this to continue. Expect that the standard home loan interest rate will have to be set one or possibly even two percentage points above prime, because the cost to the banks of funding these loans will rise that much.

Back to BMW, an investigation by Finweek found that: BMW Finance provided “better service, a more competitive interest rate & lower administrative costs than any of SA’s big 4 banks.” “FNB was the only bank that came close to providing a deal that competed with that of BMW Finance. However, the bank’s initiation fees were higher & you are required to open a primary bank account with it.”

Bill Rawson of Rawson Properties said in a press release that the move by BMW Finance, in his view, makes complete sense because the existing BMW clientele base is almost certain to be an excellent initial target market.  The link-up between motor cars and homes also increases the security of the loans because homes are a more reliable asset than vehicles.

Watch this space for other motor finance houses following suit.

More up-beat than the effects of Basel III is the belief in a slow but steady upturn and recovery in the property sector. BMW’s lead with a plunge into the market is not all that has estate agents aflutter.

–          the average House Price Index is now at a two year high and rising at 8,6% per annum.

–          a 12% plus decrease in civil summons in the first quarter of this year.

–          a 42,4% decrease in liquidations

–          the number of 100% bonds issued has risen by over 35%.

(According to the FNB Property Barometer.)

Many analysts seem convinced that South Africa can ride out the effects of the European Financial Crisis. Although difficult times may be ahead they are unlikely to differ from the difficult times currently experienced.  The impression one gets is that though ill the market is not terminal and will continue to survive as a provider of necessary products for which there continues to be a market.

Ruby Tuesday, Backleasing and Owning Your Own Real Estate

The well-worn pages on lease-verses-buy in business textbooks makes much of a meal of equipment and motor vehicles but leaves glaringly absent the application to real estate.  Perhaps the omission is the result of the specialised nature of real estate, which makes it difficult to provide simple illustration of principles.  This brings us to Ruby Tuesday. Huh?

 

Depending on your generation or where you live you may know that Ruby Tuesday was a song recorded by The Rolling Stones in 1966. The song, was a number-one hit in the United States and reached number three in the United Kingdom and five in South Africa.

 

But Ruby Tuesday is also an American multinational restaurant chain, named after the Rolling Stones hit,  that owns  and franchises the eponymous Ruby Tuesday eateries. While the name and concept of Ruby Tuesday was founded in 1972, the corporation was formed in 1996 as a reincorporation of Morrison Restaurants Inc. The centre of operations is in Maryville, Tennessee, and from there 800 sites are operated worldwide.

 

Going back a few years, analysts were asking if Ruby Tuesdays was the Canary in the Coal Mine with regards to the World Financial Crisis. Facing default on its loans back in 2008 the restaurant chain looked set to fall off its perch.  Then began a programme of sale leasebacks which arguably saved the day. So what about sale leasebacks? Should companies  own their own real estate to sell and lease back in the first place?

 

Many companies have enormous sums tied up in commercial real estate that it owns and uses for its business, whether that’s warehouses, retail stores, head office or restaurants. In the US, department stores like Dillards and Sears own their own premises. Many restaurant chains like Ruby Tuesdays and Cracker Barrel own their own outlets. Zynga , the online gaming company recently acquired their headquarters building in San Francisco for over $200million. Google bought its new headquarters in New York in 2011 for nearly $2 billion. Microsoft and Wal-Mart also own a lot of their own property; however they are also examples of companies that have made much use of the sale leaseback.

 

Commercial real estate is considered a capital intensive asset and includes, among others: office buildings, retail centres and industrial warehouses. The properties are subject to a lease contract that generally has a base rent, additional ‘rent’ covering the property’s operating costs like rates and maintenance, a term of three to ten years with the option for renewal. The base rental rate varies depending on the credit of the tenant and the location and age of the building.

 

There is an argument that it doesn’t make economic and investment sense for a public operating company to sink large amounts of capital in its own real estate. In fact the argument is that a company should not own, or be in the business of leasing out its own real estate. Companies and in particular public companies should not be tying up capital in commercial real estate. Also, owning real estate may be considered a distraction from what should be the main focus of the business.

 

In fact since the advent of the World Financial Crisis, the companies that have invested in commercial real estate are being encouraged to sell these assets and do a sale/leaseback unless the assets are of a ‘strategic investment value.’ The argument is that capital tied up in real estate should be reinvested into the company’s core business where the rate of return is greater than in a real estate investment. And there lies the rub: The expected return from investing in an operating business is expected to be higher than a real estate investment.

 

So if what the investment firms’ have locked up in property isn’t producing a return other than that which is being saved on rent by owning the property, what is there to show for it? The amount saved is small in comparison to the lost capital investment.  It could be concluded then that to multiply returns there should be a disposal of real estate assets and a reinvestment of that capital in the business to produce growth.

 

Just a reminder as to what a sale-leaseback is:  a sale leaseback option allows a company to sell its assets and lease them back simultaneously. This can be beneficial for businesses that are in need of an inflow of capital.  Unlike a traditional mortgage, which often finances 70% to 80% of the property value, a sale-leaseback allows a company to get 100% of the value from the real estate.

 

Bringing us back to Ruby Tuesday. Although as a covert strategy, purists may argue that the accumulation of real estate as a “rainy day fund” is a somewhat archaic idea, one can’t help admire in hindsight Ruby Tuesday’s desire to own substantial amount of real estate for their locations as forward thinking.  As a ‘rainy day fund’ the idea is a fly in the ointment of the non-ownership school of thought.

 

Ruby Tuesday has announced plans to acquire Lime Fresh Mexican Grill. It has launched a new television advertising campaign and increased projected annualized cost savings to $40million. The company has also begun implementing its sale leaseback plan to raise $50million through the sale and leaseback of nearly thirty outlets ending the first quarter of 2013. By quarter’s end, the firm completed a sale-leaseback deal on 8 properties, resulting in nearly $18million in gross proceeds.

 

So who’s to say, in the midst of sound financial common sense, which is what one might call the school of thought that would have businesses own as little real estate as possible, we encounter a glaringly perfect example of benefits of having real estate assets like Ruby Tuesday. One point is that Ruby Tuesday may not have been able to dig itself out if it were not for sale leasebacks, a potential solution for many medium to large enterprises to acquire much needed business investment capital.

Then again to quote Ruby Tuesday’s own lyrics from a real estate asset point of view:

Don’t question why she needs to be so free
She’ll tell you it’s the only way to be
She just can’t be chained
To a life where nothing’s gained
And nothing’s lost
At such a cost

Brian Jones & Keith Richards 1967 © ABKCO Music Inc

 

 

Onshoring in the USA with notes for South Africa

Onshoring is seeing a resurgence in manufacturing in the United States. The knock on effect for industrial and commercial real estate is debatable. What lessons, if any, are there for the South African market?

 

Firms like Ford, Carlisle Tire and Wheel Company, Otis Elevators, General Electric and Whirlpool have relocated some jobs back to the U.S. or opted to upgrade existing U.S. plants rather than resort to off-shore operations. This is in the wake of the World Financial Crisis.

 

There is some political incentive; it may be the patriotic thing to keep manufacturing plants at home. But in the end it’s the big buck that cracks the whip.  In June 2010 Master Lock a world player in the manufacture of security products, brought over one hundred jobs home that had been previously off-shored.

 

US President Barak Obama used the ‘on-shoring’ of the Master Lock factory in Milwaukee to highlight the Democrats Blueprint for an America Built to Last. The ‘blueprint’ is essentially an incentive scheme for the on-going creation of manufacturing jobs in the U.S. Coupled with this is the removal of deductions for offshoring jobs overseas. The political message is clear.

 

Heavy equipment manufacturer Caterpillar is opening a giant facility in Victoria, Texas, in the process of shifting production from Japan back to the U.S. In February, the firm announced it would also shutter a 62-year-old plant in London, Ontario – Canada that makes locomotives and move production to Muncie, Indiana.  Jumping on the bandwagon is Japanese carmaker Honda which is investing $98 million in its largest vehicle engine plant in Anna, Ohio. A significant number of firms have moved some jobs back to the U.S. or opted to upgrade U.S. plants rather than resort to off-shore operations. So there is significant movement on the manufacturing landscape.

 

In some cases, firms are actually reopening mothballed factories. In others, firms surveying the landscape have opted to open plants in states within the U.S. with the lowest labour costs and unionization rates. Something South African corporates wouldn’t be able relate to given the uniformity of unionisation across the country’s provinces.

 

In South Africa labour remains arguably at acceptable levels in the manufacturing industry – for example we aren’t seeing PE’s motor manufacturing plants moving to Botswana due to unmanageable wage demands. South Africa’s Chemicals and the Agriprocessing industries are geographically anchored and aren’t able to be moved offshore. So labour in those industries is unlikely to fear offshoring any time soon.

 

Onshoring in the US though has contributed to a steady revival in manufacturing jobs within the U.S. since mid-2010. Employment in the sector is expanding at an annual pace of approximately two per cent. But manufacturing as a percentage of the U.S. workforce will continue to fair lower down the scale since higher productivity is one of the draw cards for Onshoring.

 

Higher productivity means fewer workers producing the same amount of goods. Without appearing cynical, it must be said that this would not bode well with labour in South Africa since it would seem more desirable to have greater numbers employed to produce the same amount of goods for the sake of employment figures. But since there is no such incentive in South Africa onshoring is not a relevant dynamic in the economy for that reason. There is also the migrant labour dynamic to consider.

But there are lessons to be learned from ‘the equation’ used by U.S. corporates when it comes to deciding on the location of new factories. Factors weighed include: shipping costs and real estate; infrastructure and supply chain competence; cost, quality and obtainability of labour; proximity to suppliers and customers; taxes and incentives.

 

Previously, cheap labour and shipping costs clinched it for China and other emerging countries. However the labour market in those same countries is not putting up with the pay and conditions heretofore endured. Labour costs in China for example have risen on average almost 20 per cent per year over recent years. The result is that there’s a higher premium to pay. Similarly volatile oil prices are being felt on the transportation leg. Some estimates have transportation rising 20 to 25 per cent in the next three years!

 

But back to labour, in the U.S. over the previous four decades, productivity has hit the roof. Output per worker in the manufacturing sector has grown 136 per cent since 1987. According to William Strauss, senior economist at the Federal Reserve Bank of Chicago, what it took 1,000 workers to do in 1960 requires only 184 workers today. In 2005 goods produced in China and shipped to the U.S. were 22 per cent cheaper than products made in the United States. By the end of 2008, the price gap had dropped to just 5.5 per cent.

 

Despite productivity gains, the manufacturing sector has stopped losing jobs, instead there have been gains. Hitting rock bottom at approximately 11.5 million workers in January of 2010, the U.S. market has added 421,000 new manufacturing jobs. The sector is growing at an average annual rate of about two per cent, the fastest rate of expansion since the mid-1990s.

 

A lesson for South Africa is that U.S. analysts believe that production never really disappeared. But there are factors that are strengthening it, including a lowering of wages for manufacturing employees. Real hourly wages for U.S. manufacturing employees have remained flat since 1970. In 2000 average wages were $14.35 an hour in 1970 and $14.63 in 2009, according to the U.S.’s Bureau of Labour Statistics. Would S.A. unions put up with that?  Could S.A. workers settle for less for the sake of keeping their jobs and still increase productivity?

 

Then there’s the issue of what is referred to in the U.S. as ‘right-to-work’. This legislation prohibits agreements between unions and employers to create “closed shops” and limits auto-payment of union dues. Closed shops are workplaces where every employee must belong to the union as a condition of employment. It could be argued that in S.A. the social/political pressure makes it impossible for such legislation to be considered or even at ground level, enacted.

 

Currently, 23 U.S. states have some sort of right-to-work laws in place and that’s where the plants are being reopened or built.

 

The difference in quality of U.S. labour is a factor too. “Many of the manufacturers moving back from Asia and India say the quality control there is atrocious,” says K.C. Conway, executive managing director of market analytics with Colliers International. “We have quality control, a well-trained work force. It’s much more robust here than in Asia.” South African manufacturing labour quality seems to vary in reputation across the board but excels in the automotive and agriprocessing industries for example. There doesn’t seem much to tempt local manufacturers to move to Lesotho or Swaziland for example since workers from those and other Southern African countries populate our workforce anyway.

 

Both the U.S.’s President Obama and S.A.’s President Zuma have spoken much about the improvement of infrastructure. In President Zuma’s case there has been large allocations to infrastructural improvement in this year’s budget. Theoretically this should reduce the cost of moving goods around the country. Obama has proposed $476 billion through 2018 on highways, bridges and mass transit projects for example.

 

In overview one school of thought is that U.S. manufacturing has never really gone away. The U.S. produced 18.2 per cent of all goods globally in 2010, of course it used to be so much more, and China has surpassed the U.S.  2010 marked the first year since the late 1800s in which the U.S. was not the largest producer. China, with $1.92 trillion in manufacturing output has taken the title.

 

Along these lines, one is pointed to the fact that although it’s true that the majority of consumer goods are produced in China, the U.S. specialises in heavy machinery and goods that are the product of highly-skilled labour. Automobiles, airplanes, aerospace components and pharmaceuticals are all divisions where the U.S. retains a hefty share of world production.

 

In the final analysis the assumption we may make is that the U.S. commercial real estate industry should be strengthened by on-shoring though not as dramatically as we may be tempted to conclude. The total industrial market vacancy rate stood at 9.5 per cent at the end of the fourth quarter of 2011. It declined in every quarter of 2011 and is down a full percentage point from its recessionary peak of 10.5 per cent at the beginning of 2010. For flex space, vacancies are a bit higher—12.6 per cent at the end of the fourth quarter—but there too the rate has declined from a peak of around 14 per cent in 2010. Manufacturing space tends to be very specialized and often manufacturing companies build their own buildings and they don’t need to buy the space that existed previously. The exceptions to this might be smaller secondary and tertiary suppliers that support larger manufacturers. Those kinds of firms tend to locate in flex space.

 

Although South Africa doesn’t find itself in an on-shoring situation the lessons above remain for us to observe. Manufacturing activity in South Africa rose to a two-year high last quarter, fanning expectations that growth in the economy’s second-biggest sector is gaining impetus. This surpassed those recorded among South Africa’s main trade partners during the same quarter. Manufacturing accounts for 15% of South Africa’s economic output and 13% of formal employment. In the fourth quarter of last year, it recovered from a recession in the previous two quarters, expanding by 4,2%, according to official data. The knock on effect on industrial and commercial property is presumed and likely but can be unreliable and inaccurate to monitor.

Financial Services Employment Around The Globe

There are no prizes for guessing how much pressure, employment in the financial services sector is under these days. Scrutinizing some statistics coming in from the world’s leading financial cities may lead one to some more thought provoking conclusions. Keeping in mind that the amount of office space required is directly proportional to the volume of jobs thereby creating a knock-on effect in the commercial property industry.

London: the Confederation of British Industry and PricewaterhouseCoopers reported that UK financial institutions plan to slash investment and reduce jobs in coming months, responding to increased competition, a more imposing regulatory atmosphere and a decelerating world economy.

New York: American Banks have been most prominent in the news when it comes to layoffs last year. Bank of America, Citigroup and Goldman Sachs made approximately 60 000 jobs redundant in 2011. RBS is dropping 3500 more jobs over the next three years in addition to the 1100 slashed last year.  It’s been reported that Morgan Stanley is to shed jobs this coming month.

Looking over the last decade there are some surprising trends. Some markets have experienced growth in the financial services industry.

Toronto: There was a marked increase in financial employment during the past decade, with the exception of a recession-related decline by 2010. But overall since 2000 where Toronto’s figures for the sector were at 223 100 the growth has been a steady 3.7%. Today, financial services jobs figures are at 319 500.

Zurich and Geneva: Financial sector job growth in Zurich has increased over the last ten years. From 70 000 to 92 400 Zurich has grown by 2.7% in financial services jobs. The lesser Swiss market of Geneva has experienced similar growth over the same period. Switzerland not being a member of the European Union is arguably better placed to weather the region’s turbulent economic situation.

The most optimistic figures are coming out of Asia. Although not entirely surprising given upward growth rates in that region over the past ten years.

Shanghai: This centre of financial service for the mighty Chinese boom has experienced the highest increase in financial services employment with the total number of people employed in the sector nearly tripling over the past decade moving from an estimated 85 000 jobs in the sector in 2000 to over 217 000 by 2010. That’s an increase of 11%!

Hong Kong: This city was recently rated the world’s top financial centre deposing previous number one New York City according to World Economic Forum. Like Shanghai, Hong Kong has also experienced a rapidly expanding financial job market. The economy and property markets of Hong Kong have climbed recently due to positive domestic and regional economic growth as well as increased investment into Asia Pacific, all of which has secured Hong Kong’s status as one of the top global financial centres with financial services jobs growing 2.1% from 171 000 in 2000 to over 210 000 in 2010.

Singapore: Jobs in the financial sector are greater here than Hong Kong.  Growing by 4.6% over ten years from 100 500 jobs to 157 100. In fact the jump was 25% between 2007 and 2010 and doubled between 1996 and 2010. One could suggest that Singapore has escaped the global financial crisis given there has not been any annual decline in employment figures.

But New York City is the world’s largest market for financial services employees. Not having recovered fully from the 2001 recession, by 2008’s global financial crisis further job cuts were a certainty. The so called recovery beginning in 2009 has been decidedly feeble and has not been able to hold back the flow of cut backs. Measuring over the same ten period as above New York City’s financial services jobs shrank from 600 000 in 2000 to 531 000 in 2010.

Chicago: That other great bastion of the US financial industry dropped by 0.9% from 310 000 to 284 000 jobs over ten years.  Boston figures have also declined.

London: Across the pond, London’s recovery has been stronger than any of the main U.S. financial centres, and there’s even been a little growth of 0.1% between 2000 and 2010. London employs 300 900 in the financial service industry as opposed to 297 300 eleven years ago. As the largest financial centre in Europe, London has been confronted head-first with the Eurozone crises, while the so-called Tobin tax on financial transactions, along with a number of other upcoming national and regional regulatory changes, loom on the horizon as well.

The European Commission, the executive body of the European Union (EU), has proposed implementing a tax, starting in 2014, on all transactions involving stocks, bonds and derivatives that are conducted between financial institutions. It would apply to banks, insurance companies, investment funds, stockbrokers and hedge funds, among other financial firms. In spite of all these obstacles, however, it’s worth noting that London is still in better shape than New York—at least when it comes to the recovery in financial services employment.

One may well enquire as to what the share of financial employment is, as a per cent of the total labour force? Are some financial centres more specialized in financial services employment, versus other industries?

It’s Asia again: Studies show that Singapore, Hong Kong, and Shanghai have not only created more financial jobs over the past decade, they are becoming more specialized. Also gaining market share are the Swiss markets of Zurich and Geneva, both financial centres have become relatively more concentrated in financial services employment, though this growth has stalled since the global financial crisis of 2008.

Similar research reports that, for the most part, the more established financial centres such as New York and London have actually become less specialized in financial services employment.

Politics and regulation are likely to be very influential on the future of global financial centres and consequently the financial services employment rate. The potential financial regulation, the global economic slowdown and the EU crisis are all creating great uncertainty for financial centres.

The UK for example is resisting the EU’s proposed Tobin Tax on financial transactions especially in the light of Ernst & Young, warning that the EU could face up to a €116 billion shortfall in EU finances as a result of the loss in economic activity associated with the imposition of the tax. London is also resisting the EU’s proposed Tobin Tax on financial transactions. On London’s upside: the offshore Yuan market is gaining increased interest, with British and Hong Kong government leaders announcing plans this week to enhance cooperation in establishing London as a new hub for the offshore Yuan market, as a complement to Hong Kong.

In Asia, financial centres like Hong Kong, are displaying a far more positive outlook and higher growth rates than their American and European counterparts. In Europe there is some variance across markets; Swiss banks for example are expected to continue outperforming their European Union equivalents, thanks to favourable tax treaties and a less arduous regulatory environment.

Gulf and Asian markets are also jockeying for the growing Islamic finance market. Cities such as Dubai, Seoul, and Moscow are all competing to emerge as more prominent players in the financial market.

Pressure on employment in the financial services is real and continues to be influenced by the great undercurrents of politics, regulation and growth.  Could those in the financial services sector end up following the money, relocating from city to city as each financial centre prospers or declines? Or is it possible for growth to continue ad infinitum in each financial centre without shedding the ‘deadwood’ accumulated over a prolonged stretch of growth? Office space in global financial cities dries up or opens up in direct proportion to financial services jobs. It will pay landlords to pat the goose that lays the golden egg.

Old Mutual Corporate Social Investment

Old Mutual like any business, is in business to make profits. To what degree any business should express some sort of social conscience may be indicated by the community it does business in. In South Africa every company is under pressure to have (CSI) Corporate Social Investment programmes indicating a social conscience and a willingness to be part of social change.

Old Mutual Property, owners of Gateway Shopping Centre, announced on the 31st January “continues to look for innovative ways in which to make valuable contributions to sustainable community development and township upliftment.” This is referring, in particular, to the redevelopment of the Kagiso Mall in Mogale City.

This isn’t the first time Old Mutual Properties have done successful revamps of late. A few years back they were awarded the Golden Arrow Award for the revamp of the Riverside Mall in Nelspruit and awards were also won for the revamp of The Bluff Shopping Centre.

Kagiso is a township falling under the Mogale City municipality. The mall was an old 1980’s white elephant with poor occupancy rates. The shopping centre had become irrelevant to the community. Although the anchor tenant, Shoprite remained, a further 9200sqm of retail has been created, about 50 shops including late-night fast-food outlets.

Old Mutual Property’s Hein Smit believes this is “a sustainable contribution to the environment and township communities, which enables wider socio-economic upliftment.”     He insists that the sustainability is all in the design which includes “utilising local skills and expertise in the development phase, re-usable building materials (which are donated to the local community if not used in the new development), rainwater harvesting, low energy lighting and improved insulation specifications.”

If one is looking for Old Mutual Property’s track record there is always the Phanghami Mall which took advantage of a more decentralised retail development area servicing 8 townships and various surrounding villages.  Close to the Punda Maria gate of Kruger National Park it has a tourism component to the project.  Aspects of community upliftment in the construction and management of the centre were considered vital to the scheme.  R75 Million was invested.

Similarly Phumlani Mall in Tembisa on the East Rand was bought for R175 Million and revamped with the purpose of uplifting the community. With a reported tenant mix of 75% National chains one hopes there is something still in for local retail.

As commendable as these projects may be one has to consider them in the light of other projects on the go elsewhere. For example Old Mutual Properties has announced that it plans to invest a whopping R20 Billion in a “Town Centre” project focused on the Gautrain station in Midrand comprising 350 hectares of land.  Old Mutual Property also has Rosebank’s The Zone in its quiver. This year the plan is to add an office tower in Rosebank to the budgeted tune of R340 Million.

Throw in R2 Billion rand to be spent on revitalising Menlyn this year  it’s interesting to note that  Old Mutual Property’s  property portfolio is bordering on R35Billion 70% weighed on retail, 10% around offices with the balance in industrial premises.  One doesn’t want to detract from the good work done in the name of Corporate Social Investment but we may to keep a little perspective before feeling all warm and fuzzy.

 

Is there a pony in the room?

So you’ve  heard the story about the twins with opposite dispositions to a room full of manure? No? Well the pessimist looks at the manure gloomily and can only see a pile of dung. The optimist on the other hand casts the manure gaily into the air and intones: “with all this manure there must be pony here somewhere!”

So when we are faced with the prospect of  a specialist residential fund listing on the JSE our response  may have more to do with how we observe the manure in the room than anything else. And yes folks there is manure in the room.

TPNhave announced troubling stats indicating that “tenant payment behaviour has deteriorated for the first time in 24 months” Rental Payment Monitor Q2 2011.

To be precise they cite that “higher unemployment, high household debt and a substantial increase in the cost of electricity, fuel and food, all of which affect monthly expenses and hence the ability to pay rent.”  And yet there is a pony since they also point out that rental stock is lacking for the below R3000 and R3000-R7000 per month, brackets.

There’s more: International Housing Solutions (IHS) South African managing partner Rob Wesselo commented: “it has to happen sooner rather than later (a listing of a housing fund.), given that housing is the only sector of the broader SA real estate market where demand outstrips supply, particularly in the R200 000 – R600 000 market.”

(Wesselo) “Blames a lack of performance data from which analysts and fund managers can base profit and earnings forecasts” Financial Mail.  Again the ‘good news’ is that we haveTPNdoing just that, for example:

Tenants in the below R3 000 rental bracket are now the worst performing, with just 72% in good standing, (only 58% are in the Paid on Time category, while 18% are in the Did not Pay category). Unfortunately, tenants in the above R12 000 category are not faring much better with 74% in good standing (57% Paid on Time and 16% in Did not Pay). Tenants in the R3 000 – R7 000 category remain the best performing, where 83% are in good standing (70% Paid on Time and only 8% Did not Pay).

Yet the potential remains for enormous growth, since 68% of South Africa’s total population can afford housing priced between R250 000 and R700 000 according to the Affordable Land & Housing Data Centre. Yet only 14% of all new home registrations in 2010 fell into this category.

Wesslo does admit that rental defaulting and arrears in the affordable housing market are cause for concern among potential investors. “However, if you build the right product and manage your portfolio well, arrears and vacancies can be kept to a minimum” he told the Financial Mail.

But just when you thought it was safe, enter the Consumer Protection Act. Among other things the CPA allows the tenant to terminate a lease, at will, with only 20 business days notice, despite an appropriate penalty.  This leaves the landlord with a cash flow impact as levies and mortgages are owed. Throw in the Municipal Act , – though not done deal, and investors feel weak at the knees.

But Jeffery Wapnick from Premium Properties sees a Pony. Premium Properties owns some 2000 units in inner cityPretoriaandJohannesburg. Wapnick reckons that there are few risks involved with Residential and Retail, and other sectors.  Premium Properties experience has been that the eviction and replacement of Defaulting residential tenants is simpler that corporate ones.

So how far are we to realising a housing focused fund on the JSE? Well that brings us back to Jeff Wapnicks Premium Properties where only 40% of the fund covers residential market. There was the Kwami Residential Fund in late 2010, which Gerald Leissner (CEO of ApexHi Properties) said at the time that he was unable to put together a portfolio of sufficient capacity and liquidity to attract institutional investors.

Are we are just not ripe for such investment.  Or is there a lesson to learn from theUShousing funds. TheUStoo has a market for affordable residential rentals. And despite the economic down turn, Housing Fund Equity Residential, aChicagobased Standard and &Poor 500 member has a market cap of R125bn.  That’s almost the size of  the whole of the SA listed property sector in total.

Regardless, squinting back at some detail:  according to theTPN’s Rental Payment Monitor Q2 2011: the best performing Tenants in Good Standing are in theEastern Capeat 87% (71% Paid On Time, 16% Paid Late) whereasGautengis the worst performing province with only 75% of Tenant in Good Standing.  That could help you see where the manure is. On the other hand (IHS’s) nearly R2Billion SA Workforce Housing Fund has all the potential of listing with it’s offshore private equity investors partnering to develop 35 000 residential units by December 2011. There must be Pony here somewhere.