Bugbears still plague listed property zone

SA’s listed property sector has exploded over the past five years with a slew of listings, mergers, acquisitions and more capital raisings than any other sector on the JSE. But the question remains whether the sector’s corporate governance has improved with these changes.

The sector’s worth has grown from about R8bn in 2000 to about R60bn in 2006 and about R750bn now.

Just more than 10 years ago, then-brokerage Barnard Jacobs Mellet (BJM) released a report about aspects of corporate governance in the listed property sector that, if improved, could lead to increased shareholder returns. A major issue raised by the report, that some market commentators agree has not been addressed adequately, is that various listed property companies still have external management companies, as well as in-house executives and staff.

This means the external management company and the internal staff are both rewarded for asset management and growing the fund. A CEO could be rewarded for his or her functions as leader of the listed fund but also as head of the external management company.

In 2006, BJM said separate management companies were an “international dinosaur”.

When real estate investment trust dispensation would be introduced some seven years later, in line with international best practice, funds would choose to be internally managed, it said.

Many real estate companies that are externally managed on the JSE chose that route because they were small and needed funding, operational, human resource and other support from a larger management company. Others have reached a certain size and should consider internalising management. A few are managed externally because their legal structure makes it compulsory.

Listed companies that have external management companies include Octodec Investments, Investec Property Fund, Texton Property Fund, Dipula Income Fund, Liberty Two Degrees, Transcend and Delta Property Fund. Recently listed Liberty Two Degrees is a collective investment scheme or trust, which means it has to have external management in terms of the law. But Evan Robins of Old Mutual Investment Group says when it comes to shareholders’ interests, there is often not a compelling argument for choosing the external route.

“I don’t believe external management companies can benefit shareholders more than an internally managed fund can. For a small new company, external management may cost less initially, but that’s because the external manager is taking a loss now because it hopes to grow the fund to a size where it is profitable for them. Shareholders would have been better off if it was internal from the start,” says Robins.

“You can justify an external management company only if it is a legal requirement, brings a business advantage, for example broad-based economic empowerment credentials or there is no other way to access the assets,” he says.

Chief investment officer of Bridge Fund Managers Ian Anderson says external management companies can help smaller funds that are looking to build their portfolios and to establish a credible track record. They can operate in a way that they do not negatively affect shareholders. This can be done by providing expertise at a lower fee than would be spent elsewhere and protecting funds from hostile takeovers.

Head of property investments at MMI Nesi Chetty says that it is often unclear how the fees paid to the external management companies are “used and distributed”.

Chetty says that the companies should be more transparent as there are potential conflicts of interest which can disadvantage minority shareholders.