First South African property fund to list under the new REIT structure
Tower Property Fund was officially the first new fund in South Africa to list on the main board of the JSE under the Diversified REITs sector when it listed on 19 July 2013.
Tower successfully raised R300-million for the listing.
REITs (Real Estate Investment Trusts) have been introduced in South Africa to bring the listed property sector in line with international standards and are tax advantaged investment vehicles that invest in and derive their income from income-producing property and distribute rental income to the holders of shares or units.
“By investing in REITs investors are given exposure to a diversified portfolio of properties, which may be high quality office, industrial and retail properties, in one investment,” says Marc Edwards, CEO of Tower Property Fund.
Tower was well received by investors and its shares rose from the initial offering of R8.70 to R10 per share on the first day of trade. The fund has benefitted from its REIT status as a number of smaller developers have placed their properties into the fund in exchange for shares to take advantage of the Capital Gains Tax Rollover relief they obtain.
“Tower aims to provide investors with strong investment returns, comprising a growing income stream and capital value. This will be achieved firstly by adding value through active property asset management, and secondly through the cost-effective ‘greening’ of properties in the portfolio, which will result in reduced occupation costs for tenants and increased investment performance,” says Edwards.
“Our investment strategy is to target acquisitions of medium-sized (R30-million to R200-million) properties, diversified across the retail, office and industrial sectors, and geographically across the major metropolitan areas. Competition for medium-sized properties is less intense, and well-located, good-quality, medium-sized properties provide a diversified earnings base, better yields and, frequently, the opportunity to improve performance. However, larger properties will not be excluded where suitable opportunities arise.”
“Properties acquired, and to be acquired, by Tower were and will be selected for their potential to generate and sustain strong rental income streams,” explains Edwards. “Diversification is a key component of the company’s investment strategy, and is achieved through a geographic spread of properties across major urban centres, a mix of property types, a staggered lease expiry profile and the fund’s active ‘greening’ strategy.”
According to Edwards, Towers’ initial ‘greening’ focus will be on improving energy efficiency, which will result in significant savings in electricity costs, thus making buildings more competitive and helping to ‘future-proof’ them against future rises in tariffs. Basic cost-effective energy and water savings measures that can be implemented at low or no cost will be applied immediately, while additional measures will be implemented over time as opportunities arise.
“We will be benchmarked against the Green Building Council of South Africa’s Energy and Water Benchmarking tool and improvement in performance will be monitored and reported on. These measures will increase the competitiveness and values of buildings in Tower’s portfolio over time.”
South African property owners and businesses seek more from their financiers
Entrepreneurial, owner-managed South African businesses and property owners are increasingly looking for more value added services and flexible financing arrangements from their lenders than prior to the economic crisis in 2008. This is according to Gary Palmer, CEO of Paragon Lending Solutions, who says that prior to the financial meltdown, clients primarily sought finance from their lender.
“As market conditions deteriorated, the client’s needs changed and are now not only asking for access to finance if they require it, but also with assistance for buying and selling of property, how changes in regulations affect their investments, how market conditions can affect their business practices and how lenders can assist them with a variety of other financial matters.”
Recent credit data from the Reserve Bank has indicated that growth in unsecured lending has slowed, while mortgage lending has only grown at less than 2% a year because banks have tightened rules around long-term lending. However, Palmer says that South Africa’s economy still offers good opportunities for entrepreneurs and owner-managed businesses if they employ the right strategy and utilise diverse value-added services.
“Smaller businesses and property owners unfortunately do not have access to financial advice and support in the same manner as larger corporations do. These larger businesses are in the position to employ experienced staff who have established relationships with commercial banks, have additional financial advice from auditors and access to legal experts who have a thorough knowledge of that enterprise.”
As a result, Palmer says that private non-bank lenders, who are also not governed by the same regulations as the major banks, are in the ideal position to assist clients who require financial assistance via their value added services. “Private lenders are usually entrepreneurs themselves and therefore understand and can identify with entrepreneurial challenges and how to respond to them.”
Palmer says that no matter what the businesses situation, they should always consult a professional lender to assist with cash flow forecasts. “A financial oversight can potentially bring devastating financial losses if adequate planning, risk management scenarios and financial resources are not in place.”
He adds that a financier can also assist with the sale and purchase of a property to ensure that all legal and compliance affairs are in order. “Property rights and the associated legalities are also complicated issues and individuals often misunderstand what is required of them or neglect to consider what the legal parameters are when looking to finance a property deal. This is particularly important when it comes to urban development and town planning matters,” says Palmer.
Furthermore, he says that a financier would also facilitate if a client is considering buying a distressed apartment block. “The financier would only be able to lend to the client if the National Home Builders Registration Council (NHBRC) is involved and deems the building as compliant,” he says.
“However, one of the most common mistakes property owners make is that of under or over insuring because they neglected to have an appropriate property valuation conducted at the offset, due to bad or incorrect advice.”
Palmer adds, “Non-bank lenders can also assist with deceased estates to prevent any loss of capital and to protect the financial interests of the heirs. The Master’s office supervises the administration of deceased estates to ensure an orderly winding up of the financial affairs of the deceased in terms of the Intestate Succession Act, 81 of 1987.”
Finally, he says that there may be certain transactions which are more suitable for commercial banks. “The lender may also be in the position to assist with Commercial Bond Origination by applying for a commercial loan on their behalf. The client submits a variety of financial information to the lender who will determine their eligibility and what interest rate he or she will pay,” he concludes.
Escalation of Green Star South Africa ratings in month of June
June proved a bumper month for green building certifications with a total of six new buildings receiving a Green Star South Africa rating from the Green Building Council South Africa. This upsurge further substantiates that the green building movement is rapidly gaining ground in South Africa as developers and progressive businesses increasingly embrace sustainable building practices.
These new ratings take the total number of Green Star rated buildings in South Africa to 36, and include some impressive and significant developments such as the Department of Environmental Affairs’ head office, which has scored a 6-Star Green Star SA rating – the highest rating possible and a first for a national government-owned building in South Africa.
Hyundai’s new head office, situated in Bedfordview, is another exciting development to receive a Green Star rating as it signifies buy-in and commitment to sustainable practices from this large motor corporation – the first green building rating in South Africa achieved within this sector. The Hyundai building, which achieved a 4-Star Green Star SA Design rating comprises two floors of A grade office space and one basement level, and will accommodate 200 full-time employees.
Another notable rating is that of the 9 000m2 Chevron Project CORE building, situated in Century City in Cape Town, which achieved a 5-Star Green Star SA Design rating – an exciting indication of the shift in mindset towards green business practices from one of the leading refiners and marketers of petroleum products in South Africa – Chevron South Africa.
The impressive Portside building, which achieved a 5-Star Green Star SA Design rating, is a joint initiative between Old Mutual and FNB, and is set to become an impressive landmark tower in the foreshore area of Cape Town’s CBD – featuring 32 floors, over 52 000m² of office space and 1 200m² of retail and banking space.
The Lakeside Office Park in Centurion, which is a redevelopment of the Meerlus building, not only scored a 4-Star Green Star SA Design rating, but also recently won the (SAPOA) Innovative Excellence Award for Green and Industrial Property Development. Located opposite the Centurion Gautrain Station and with easy access to the national roads network, the building offers over 5 000m2 of lettable space for tenants seeking proximity to major transport nodes and other amenities. The building is the first of three to be developed in the Lakeside Office Park.
Finally for June there was the 5-Star Green Star SA ‘As Built’ rating achieved by the Nedbank Menlyn Maine – Falcon Building in the Menlyn Maine Precinct. The Menlyn Maine Precinct is envisaged as a live, work, play neighbourhood where the buildings and urban planning design strongly subscribe to environmentally sustainable principles. All buildings within the precinct will be required to achieve, at a minimum, a 4-Star Green Star rating, and it is the first project in Africa to be registered with the Clinton Climate Initiative, a stringent rating mechanism evaluating the carbon neutrality of a project.
“The GBCSA is very encouraged to see this spike in the number of buildings achieving Green Star SA ratings,” says Brian Wilkinson, CEO of the Green Building Council South Africa. “We are confident that the green building movement in South Africa will continue this upward trajectory and that we will increasingly see green building practices becoming the norm. The industry is embracing this absolutely necessary shift towards sustainable practices and it is exciting to be part of this change.”
Property buyers beware! Rates clearance certificates are a cold comfort
In a ruling with significant implications for property owners and banks, the Supreme Court of Appeal (SCA) recently held that all amounts due for unpaid debts are secured by the property, even when a rates clearance certificate has been issued confirming that municipal charges for the preceding two years have been paid.
Lior Nickig, associate attorney at pan-African corporate law firm Bowman Gilfillan, explained that for new property owners this means they are at risk regarding unpaid municipal debts that are more than two years old, and the property concerned can be sold in execution and the proceeds used to pay the outstanding debt.
“The Supreme Court of Appeal recently held, in City of Tshwane Metropolitan Municipality vs Thomas Mathabathe and Nedbank Limited, in relation to a section 118(1) clearance certificate issued in terms of the Municipal Systems Act 32 of 2000, that all amounts due for unpaid municipal debts are secured by the property.
“The SCA held that all amounts owing to the municipal authorities that have not prescribed are secured by a lien on the property and this lien is not lost when the property is transferred,” explained Nickig.
The SCA confirmed that if municipal charges for the two-year period preceding an application for a clearance certificate are paid, the municipality is obliged to issue a clearance certificate.
However, the court also held that if there are additional charges due over and above those that arose during the two-year period, the municipality is not entitled to withhold the clearance certificate.
The remedy available to the municipality in respect of these charges is that it exercises a lien in respect of the property for an unlimited duration. It was confirmed that if these charges are not paid, and an appropriate court order is obtained, the property may be sold in execution and the proceeds applied to the unpaid debts.
Nickig explained that, in practice, this means that the new property owner is at risk in relation to charges owed to the municipality for unpaid debts older than two years.
“Conceivably, this means that the municipality could sue the previous owner for outstanding charges and if the previous owner is unable to satisfy any judgment obtained in this regard, seek to sell the property in order to satisfy the judgment.”
“A purchaser of a property will be well advised to ensure that once a rates clearance certificate is issued, there are no additional amounts owing to the municipality. In circumstances where there are outstanding charges owed to the municipality, a purchaser should obtain sufficient collateral from the seller in order to limit its exposure.”
National Debt Mediation Association (NDMA) welcomes survey showing consumers benefit from alternative dispute resolution services
The National Debt Mediation Association (NDMA) has welcomed a survey by the National Credit Regulator (NCR) that shows that alternative dispute resolution (ADR) services offered to consumers are largely seen as effective in resolving a range of disputes between service providers and consumers.
“Alternative dispute resolution, which includes mediation, offers consumers a way to resolve their disputes in a quicker, simpler and cheaper manner instead of following a court process that is adversarial and expensive,” says NDMA CEO Magauta Mphahlele.
Within a short period of time, the NDMA has been able to establish its footprint across most provinces and has handled more than 6 000 disputes and complaints with more than 70% success rate for cases with a resolved outcome. The high success rate of alternative dispute resolution is confirmed by the research report which reports that 85% of respondents were satisfied with ADR services provided by various entities and would recommend them. However, the report indicates a low usage of free services offered by the NDMA, NCR, provincial offices and ombudsman. It is important to note that the low usage might also be due to private companies having very big marketing budgets and therefore consumers being more aware of their existence. This is supported by the finding of the report that a majority of consumers heard about the services through newspapers, radio and television.
“Over the past few years, the NDMA has been advocating for mediation as it is able to help consumers through the often legally complex and technical aspects of credit and payment disputes and offers huge benefits to consumers, especially low income consumers who most times cannot afford the services of a lawyer,” says Mphahlele.
The NDMA, which is currently in the process of transitioning into an independent consumer services NGO, is considering applying a mixed model where those who can afford the dispute resolution services are charged a nominal fee, but those who cannot afford it are assisted for free through donor funding or partnership referrals. This is because the report indicates that consumers sometimes prefer to pay for these services as this gives them the confidence that their ADR agent will be on their side and will be committed to ensuring the case is resolved in their favour. This should, however, not discount the important role played by the various ombudsman schemes as they service an underserved and often low income and vulnerable market. Consumers need to understand that ADR often happens through mediation where the purpose is to find win-win solutions and therefore there is always a balance of rights and responsibilities.
The report proposes that ADR agencies need to be regulated. While the NDMA agrees with this proposal to some extent, it is important to note that most service providers, including ADR service providers are regulated by the Consumer Protection Act, which covers advertising, service standards, contracting and fair pricing. It is therefore important to consider what is already covered in existing legislation before additional regulations are imposed. Concerns raised by the NDMA regarding some ADR agents are misleading advertising, overcharging and lack of transparency. The NDMA and the various ombudsmen report publicly on the cases received and resolved and this ensures accountability and transparency.
The services offered by the NDMA include:
- A national helpline that provides information on any credit related matter, including the explanation of the options available to consumers to resolve their debt problems.
- Budgeting and payment plan assistance where consumers are experiencing difficulties with repaying their debt.
- Assistance with credit disputes, except debt counselling complaints which are referred to the NCR.
- Direct or employer hosted consumer education workshops.
- Referral assistance where the NDMA does not have jurisdiction.
New South African REITs and real estate as an asset class – not all it’s cracked up to be?
Much has been said about the benefits of the new Real Estate Investment Trust (REIT) structure which has become available to the South African property sector.
Aimed at aligning the South African listed property sector with our international counterparts, REITs may create a more attractive investment structure, significantly enhancing international interest, whilst at the same time bringing about much needed tax and regulatory changes that local property structures could certainly benefit from in the long term.
However, Grant Alexander, director of Private Client Holdings, warns that REITs might not offer investors as much as hoped and advises that real estate as an asset class holds several pitfalls which South African investors must be aware of.
“The arguments in favour of listed property include diversification with strong, predictable returns when equities are weak; good yields compared to cash; benefits afforded in a low interest rate environment and being a good inflation hedge.”
“However, there are many arguments against listed property,” says Alexander. “Volatility is higher with listed property than a defensive or balanced portfolio; property yields are currently lower than bond yields making property more expensive but there is more risk associated with property; the rand is a threat to our bond market and given the close correlation, the property market is also under threat from a weaker rand; lower economic growth causes increased vacancies and rising operating costs will eat into profits.”
Alexander states that rising bond yields is the main threat to the sector – higher yields mean lower prices.
“Listed property has benefitted from strong retail performance – and many of the factors which have led to this strong performance, such as unsecured lending and salary increases ahead of inflation, are unsustainable. If the retailers slow down, the property sector will slow down as vacancies rise and retailers will start resisting annual rental escalations more.
According to Alexander, the introduction of REITs to South Africa will make real estate more attractive to foreign investors, but it does not significantly change the South African property investment structure compared to the previous regime. “It is thought that one of the main benefits provided by the REIT structure is the tax change. South African investors will receive gross distributions from a South African REIT entity – without the 15% dividends withholdings tax being levied. However, investors will have to pay tax on the distributions at their applicable marginal income tax rate, so paying tax is unavoidable,” says Alexander.
“Real estate is a complicated asset class as one must consider many factors such as occupancy levels, yields and retail demand. However, all of this being said, REITs are a good diversifier and should be held as part of a balanced portfolio, but if you intend to buy as your sole focus, caveat emptor – ‘let the buyer beware’,” concludes Alexander.