Funds have a riposte as property buy-back trend gathers steam
More companies are expected to become owner-occupiers of their head offices and secondary premises by buying back properties from listed landlords so they don’t have to pay monthly leases.
But this is not all bad for listed property funds. Growthpoint Properties MD Estienne de Klerk says some large property groups are likely to develop and sell offices to tenants. He says large property funds are able to provide an array of services for tenants that go beyond being a traditional landlord.
"In the early 2000s, sale and lease-back agreements were commonplace for companies and their landlords. The listed property sector was quite new and the funds in it were not that big yet and didn’t have that much stock. Large companies sold their head offices to listed funds and leased them back. Now corporations may ask a Growthpoint to develop an office and then the company will own the office. Growthpoint will gain development profit," he said.
Investec announced recently that it would buy back its head office from Growthpoint, which had bought the office from and was leasing it to Investec.
Growthpoint is the largest listed property company in SA.
De Klerk says the market has changed and property companies now have an array of business relationships.
Locally, some large listed property companies are trying to diversify their income streams. This includes earning development income and project fees, as well as renting out solar panels on buildings.
However, real estate investment trusts (Reits) need to ensure that they do not jeopardise their Reit status.
At least 75% of a Reit’s income must be derived from traditional rent under Treasury regulations, says Izak Petersen, the CEO of Dipula Income Fund and chairman of the SA Reit Association.
To gain more traditional rent, Reits can invest offshore where sale and leaseback agreements are less common, says Evan Robins, the property manager of Old Mutual Investment Group’s MacroSolutions boutique.
Investec Bank’s decision to buy its head office follows the practice among other banks. More are likely to follow.
Under International Financial Reporting Standards regulations, banks are required to account for leases as liabilities. The associated costs are expensed through income statements, which affect profit.
For this reason banks are choosing to own their own offices. They may then upgrade the office themselves. Another reason may be prestige. Investec, for instance, wants its office to compete with RMH and FirstRand, whose offices are newer and more noticeable.
Economist Erwin Roode says for the past five years a number of large South African companies have sat on piles of cash and they may want to spend this cash on building prestigious offices that will promote a "sophisticated image" and may even "become iconic".
"If prestige plays a role in any subsector of property, office [space] is that subsector. Of all the business nodes in the country, Sandton is the premium one. If you own an office in Sandton, it has to be attractive and give some kind of visual impact that will last."
Investec’s head office stood out among its peers for about a decade but is in need of a facelift, says Investec chief financial officer Nishlan Samujh. He is not revealing any details about it, but says the group wants to spend money on an upgrade and has partners that can do the work.
Herman Bosman, the CEO of RMH, says FirstRand owns the four buildings that make up the development located on Fredman Drive, Sandton.
RMB is based at 1 Merchant Place, which is known as the tower building. He says the premises are well managed and the banking group is not challenged by escalations in rent and lease costs that a landlord may enforce.
De Klerk says Growthpoint was sad to lose Investec as a tenant in Sandton but the landlord already has a strong presence in the node.
The R2.2bn it will receive for the sale may be redeployed overseas, specifically in Romania, where it has begun to generate strong returns after about a year of settling into the market.
Growthpoint is trying to free up about R10bn in capital by the middle of 2018, according to De Klerk.