Capital Property Fund
The Capital Property Fund was established in 1984 as a property unit trust. The trust is obliged to distribute all its net rental income to unitholders. The nature of the income distribution means that Capital is exempt from income tax, and it is also not liable for capital gains tax at a trust level.
Real estate assets total approximately R20bn of which R15bn is ‘stabilised rental earning property’, R4bn represents investment in the ‘shares in other listed real estate companies’ and Capital has R1bn in ‘properties under development’. The ‘ stabilised rental earning property’ represents the largest portfolio of A-grade logistics facilities in South Africa. In addition, the portfolio includes A- and B-grade off ices and a small retail portfolio. The ‘shares in other listed real estate companies’ represent ownership stakes in NEPI (euro- denominated earnings), Rockcastle (dollars), Fortress A& B and Resilient (rand). The ‘Properties under development’ category represents development properties and land for logistics.
The fund is managed by an external management company, which is owned by Resilient. Traditionally, externally managed property companies are characterised by a misalignment of interest between the owners of the management company and that of the shareholders of the property funds. In the case of Capital it could be argued that this misalignment is not as severe, as Resilient owns approximately 10% of the Capital shares in issue, representing a value of approximately R1.6bn. In addition, Resilient provides loans to Capital executives to acquire shares in Capital. Key management own approximately 3% of the shares in issue worth approximately R500m.
Capital Property Fund has spent the last few years repositioning the portfolio by selling predominantly poorerquality office buildings and redeploying the proceeds into new, modern logistic facilities, land for development, premium-grade office properties and offshore listed real estate. In the 2012 and 2013 f inancial years, it divested out of a total of R2.5bn in poorer-quality assets. At the same time, Capital has enhanced the quality of the portfolio without diluting short-term income, and acquired an enviable development pipeline. On 30 June 2013, the estimated construction cost of the 522 000m² development pipeline stood at approximately R4bn (about 20% of the current asset base). Management’s expectations are that these developments should yield approximately 9% on cost. Capital’s loan to value ratio is approximately 21%, implying that it has adequate balance sheet headroom to fund this entire pipeline with debt at a weighted average hedged cost below this yield. Management has proven that it has the skills to roll out developments on time, let and within budget.
Assuming the fund manages to do this again, it would further enhance the quality of the portfolio and earnings. Management could also choose to sell some of its listed portfolio holdings to fund the development pipeline. The R4bn holdings are yielding approximately 7%, implying that recyc-l ing into stabilised assets at 9% would be immediately earnings enhancing (in the amount of approximately R80m per year and growing). These listed securities holdings are forecast to deliver