SA Corporate Real Estate’s vision is to exceed its stakeholders’ expectations by generating superior, sustainable returns, investment in quality real estate assets, optimal allocation of its capital resources and the sustainable management of its operations in a way that delivers lasting benefits for all its stakeholders. After a slow start, it looks like this vision will start to be realised.
The one and only thing that is certain in business is change. Change provides opportunities, it creates competition, it generates demand and it moves people. In today’s complex and challenging commercial environment, it’s virtually impossible for organisations to make sound strategic decisions and completely accomplish objectives when deprived of strong change management strategies. This is especially true in the world of project, program and portfolio management, where obstacles and ambiguity are inevitable at every juncture.
Change is vital and many influential figures throughout history have been quoted recognising its importance. Charles Darwin said: “It is not the strongest or the most intelligent who will survive but those who can best manage change,” Bill Clinton said: “The price of doing the same old thing is far higher than the price of change,” and Benjamin Franklin remarked: “When you’re finished changing, you’re finished.”
One organisation that has realised the value of change in the past few years is SA Corporate Real Estate, a Corporate REIT (Real Estate Investment Trust) listed under the Real Estate, Diversified REITs sector of the South African Stock Exchange, the JSE.
SA Corporate is one of the oldest and most established property companies in the South African market. The company features an attractive portfolio diversified across 166 properties which covers 1.39 million square metres of lettable space.
This type of business is now hugely important and supports many jobs across the country. REITs are tied to almost all aspects of the economy, including apartments, hospitals, hotels, industrial facilities, infrastructure, nursing homes, offices, shopping malls, storage centres, student housing, and timberlands. The model has become popular because of the different types of regular income streams, diversification and long-term capital appreciation that they offer.
SA Corporate has an interesting history. For a long time it was considered an underperformer in the market because of a series of poorly timed acquisitions, disposals and funding structures. There was also a management problem and a lack of direction after the business went through five CEOs in six years. But in August 2012, change for the better came along and brightened up the outlook for the fund with the installation of Rory Mackey as CEO and eventually, in December 2012, he took over as Managing Director and went about making changes that have so far proven to be successful.
Mackey was formerly Group Executive: Commercial at Airports Company South Africa Limited. He was also General Manager of Africa’s largest airport, OR Tambo International Airport, from 1996 to 2001. He also worked as part of the team managing the Old Mutual Investment Group South Africa Alternative Investments boutique from 2008.
STRATEGY DEVELOPMENT
A change in strategy has resulted in a change in fortunes for SA Corporate following the implementation of a four pillar turnaround strategy at the beginning of 2013, which was aimed at driving a turnaround in performance of the company and providing a base from which it would be able to deliver sustainable distribution growth in the future.
As a result of the four pillar plan, the 2013 financial results proved to be some of the strongest in the fund’s history, for the first time exceeding the 32c/share distribution which it achieved back in 2007. The 8.6% distribution growth was an impressive performance, not only against its own historical earnings growth numbers but also in relation to the market in general.
From an operational perspective, the company delivered strong results with like-for-like property income increasing by 9.1% (adjusted for the unit buy-backs). This was driven primarily by in-force escalations of more than 8% and the continued compression of vacancies.
Management has been reasonably active in allocating capital recently, with nearly R500m worth of acquisitions made and a further R254m committed to other deals. This includes what is now SA Corporate’s third-biggest asset, the World Trade Centre in Sandton.
In March, Mackey said: “The total net property income growth increased 19.4% due mainly to R1.7bn worth of acquisitions over the past two years,” after the announcement that for the second half of last year, distributions were 9.4% higher than for the second half of 2013. Overall distributions across the total portfolio grew 9% for the year to December last year, compared with the year to December 2013. The market average for the same period was just 8%.
Vacancies were down 3% at the end of 2014 compared with the same period in 2013 and Mackey said: “Further reductions are anticipated as we seek to improve the quality of the retail portfolio through redevelopments.”
RESIDENTIAL
One major strategy change that has attracted attention in recent times was SA Corporate’s investment into Affordable Housing Company (Afhco) and its Johannesburg assets, in a substantial R953-million transaction that saw the fund delve deeper into residential property than it has ever done before. Listed property funds are increasingly investing in residential property because of improved stock becoming available and demand for affordable housing.
Immediately after the announcement of the acquisition, shares in the fund began to surge with investors buoyed by what SA Corporate call ‘arguably the most attractive JHB Inner City CBD residential portfolio offering scale, quality and diversity’.
“Our strategy is to achieve residential critical mass in precincts either in close proximity to transport hubs or being in prime city locations and leveraging off high residential density and foot count to achieve high retail performance is well on track,” Mackey said.
Another significant decision made in 2013 that complemented the investment in Afhco was the award of the entire portfolio to property management specialist Broll. At the time, SA Corporate’s portfolio comprised 139 properties, covering 1.19-million square metres of lettable area and Broll was the natural choice.
“Broll has a particular competence in managing retail properties of the range of sizes in our portfolio and intelligence in trends in South African logistics necessary to drive the growth of the fund’s portfolio,” Mackey said at the time.
“Itisnowoursinglelargestclientinourpropertymanagementbusiness.WewereimpressedbythepassionandtheintegrityoftheSA Corporateteamduringtherigoroustenderprocess,” said Broll CEO, Malcom Horne.
CHALLENGING TIMES
Even with a diversification strategy and generally improving stats in retail and industrial units, SA Corporate is still facing a big challenge in the coming years with a dull economic outlook showing no signs of brightening up.
Real estate has been one of the main industry sectors driving the economic growth that SA has witnessed since the dawn of democracy. However, very few economies were safe from the global recession of 2008 and SA, and many others, are still recovering from the problems faced during that difficult time.
Unemployment is high (sitting at around a quarter of the population), growth rates are slow (this year showing well under 2%) and there is a trend for many businesses to look outside of SA to diversify their offerings during these slower times. Also, the three powerhouse provinces (Gauteng, KZN, Western Cape) provide the majority of the economy’s GDP meaning, outside of these areas, there is little opportunity for investment.
However, according to PWC Global Real Estate Leader, Kees Hage, the real estate industry is one which should grow over the next six years despite the challenges ahead.
“High energy prices, climate change and government regulation are already pushing sustainability up the real estate agenda, but by 2020 their impact is expected to be far greater,” he says. “Technology is already disrupting real estate economics, but by 2020, it will have reshaped entire sectors. And the real estate community will have taken a greater role in the financial ecosystem, in part moving into the space left by the banks.”
A report by PwC, titled Real Estate 2020: Building the Future predicts that the global stock of investable real estate will expand by more than 55%, from US$29.0 trillion in 2012 to US$45.3 trillion in 2020 and the global audit company says that global megatrends will drive growth opportunities in the real estate industry across the African continent.
In South Africa, the government is pouring resources into infrastructure developmentand there is significant urbanisation with development in the major hubs that SA Corporate knows well. From 2001 to 2014, six of the world’s ten fastest-growingeconomies were in sub-Saharan Africa and of course this means that international investors will always be interested in these regions.
Now with a stable management team which is injecting energy into the fund and opportunities being presented for development, it is likely that SA Corporate will likely further its already impressive performance and finally fully shake the tag of ‘underperformer’.