Cap­i­tal Prop­erty Fund

Finweek English Edition - - INVESTMENT - Paul Dun­can is an in­vest­ment man­ager at Cat­a­lyst Fund Man­agers

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

SOURCE: mcGre­gor BFA

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.