WITH the focus of the South African listed property sector shifting to attracting international investors so it can become a global player, there is growing criticism of the external asset management company concept.
While a growing number of local listed property companies are adopting internal asset management structures, there is still a significant number of JSE-listed property stocks employing external asset management companies.
The South African listed property sector consists of property unit trusts and property loan stock companies. In terms of South African law, property unit trusts must have outside asset management companies, while property loan stocks have the choice of internal or external asset management.
Asset management involves buying and selling properties, while basic property management involves the day-to-day running of the property portfolio.
Most analysts prefer internal asset management structures as management objectives are more aligned with unit holders’ interests. They say there is a potential for conflict of interest with external asset management companies as the asset management fee earned is normally about 0,5% a year of the total assets.
This could lead to a situation where the external asset managers grow a listed property fund’s portfolio for the sake of bulking up the portfolio and earning a higher fee.
The issue of external management companies in the South African listed property context has been debated previously but last week the matter was raised by top US real estate investment trusts (Reits) player Sam Zell, who was speaking at a Reits conference hosted by the local Property Loan Stock Association.
The Property Loan Stock Association, which represents 25 JSE-listed property loan stock companies, hosted the conference to garner support for the adoption of the Reits structure in the country.
Zell says most US Reits have internal asset management and that he is uncomfortable with the widely used external asset-management structure as used by Reits in Japan — because of the potential for conflicts of interest.
“As an investor I wouldn’t be comfortable with an externally managed company,” says Zell.
Craig Hutchison, CEO of Pangbourne Properties, says local property companies have a better chance of attracting international investors if they have internal asset management.
Hutchison says there is potential for outside asset management companies to grow a listed property fund for the sake of the fees it earns.
He says external asset managers would be interested in short-term investments, while internal managers would look at long-term prospects.
“I believe all shareholders should be put off by outside management, not just overseas investors,” says Hutchison.
But he believes more and more listed property companies are going to be switching to internal asset management.
Colin Young, head of asset management at Old Mutual Property Group, says internal asset management is “definitely preferable”.
“You remove conflicts of interest. The big conflict for me is that the asset management fee is 0,5% of assets, not income. If it was a percentage of income they (asset managers) would be more aligned to unit holders’ objectives. Because they earn a percentage of assets, their main incentive is to grow,” says Young.
He says the overseas trend, in the US and Australia for instance, is towards internal asset management. “This is a preference of foreign investors,” says Young.
He also reiterated what Zell said at the Reits conference about SA adopting the Reits structure. “Zell said if you want to play with the big boys, you’ve got to look like us. If SA is serious about attracting foreign investment, outside management companies don’t work.”
He said the new Reits structure should also include internal asset management.
But Wolf Cesman, executive director of Madison Property Fund Managers, an external listed asset management company which asset manages listed property loan stock companies ApexHi Properties, Redefine Income Fund and Hyprop Investments, says when property funds are the size that they are in the US they can afford to employ “top-rate skilled property people” for internal asset management.
“I am not sure we are at that stage in SA. The other question is are there enough skilled people to be employed in-house?”
He says fellow executive director Marc Wainer and he himself manage three property funds. They are also directors on the boards of the companies they manage.
Cesman says the main reason the asset management issue was raised at the conference was because of the potential for conflict of interest.
