Why SA banks love big property companies

What global sub-prime crisis? In South Africa, traditional bank finance is trumping other methods of capital raising, like share issues and securitisation.

What's more, a bank has recently granted the largest unsecured loan facility ever to a property company - R2bn to the JSE's biggest property company Growthpoint.

That's according to Frank Berkeley, managing director of Nedbank Corporate Property Finance, who says there are some great investment opportunities for big property players "and the funding to match".

Quoted in the latest Property Loan Stock Association's PLSA News (May edition), Berkeley sad the impact of the global credit crisis on South African listed property companies' access to finance has been minor.

 "The sector has remained largely unaffected by the sub-prime problem and furthermore the country is also somewhat isolated from the rest of the world as a result of its exchange controls, which protects it to a degree," he said.

Nedbank Corporate Property Finance says it provides about R20bn of commercial property finance each year. Its clients include leading listed property loan stocks Growthpoint Properties Limited, Resilient Property Income Fund, Diversified Property Fund, Pangbourne Properties, Acucap Properties and SA Corporate, amongst others. It also funds iconic property developments such as the R1bn landmark Melrose Arch Piazza scheme in Joburg's leafy northern suburbs and the R65m Boulevard Square in Cape Town's Century City. It is both funder and partner in the R530m Mooi River Mall in Potchefstroom.

According to the PLSA News article, in the current market, traditional bank finance is preferred to other methods of capital raising such as share-issues and securitisation. Currently out of favour: securitisation and other similar vehicles were effectively the cause of the subprime crisis - which stemmed from the securitising or packaging of lesser-quality home loans.

"This caused a huge number of problems in the banking and insurance industry," Berkeley told PLSA News.

He said he expected securitisation to regain popularity over time, however "there are not many who are keen to purchase this paper presently". In addition the former attractiveness of structured finance plunged in 2006 when Trevor Manual attacked the structures.

"Listed property companies remain good borrowers for banks with their low gearing - generally below 50% - and are still able to access funding," said Berkeley. 

In April Nedbank Corporate Property Finance granted Growthpoint Properties Limited R2bn in additional debt facilities, comprising an unsecured 5-year loan - the largest unsecured facility to be granted to a South African property company.

Listed property, said Berkeley, has had a difficult few months in terms of share prices. "However, property is, and always has been, a long-term investment."

Berkeley said banks are looking favourably at deals where the "fundamentals are strong".

"There are certainly some great deals coming across our desks and managers of listed property funds should not be afraid to pursue a good deal with long-term benefits above market expectations about short-term distribution growth. After all, unlisted property companies, who do not have the same linked-unitholder pressures, have shown the fastest growth in the sector."

The effects of nine consecutive interest rate hikes and the quick and severe turning of the property cycle are likely to be felt for another 18 to 24 months before the industry finds itself in a better space, said Berkeley.

"South Africa's seasoned property professionals have weathered worse. They know to plan at the top for the bottom and visa versa. It is the newer entrants to the property industry, those who have only been in the industry for some 5-years or less, who could be learning some very hard lessons in this climate," he noted.

There are effectively two variables for property finance - pricing and period. Listed property companies by-and-large opt for fixed pricing as an interest rate hedge, said the PLSA News.

"Margins on finance are expected to increase across the board. The banking industry has been exceptionally competitive over recent years, cutting margins substantially. This era has come to an end. There has been a massive wake-up call in the banking industry world-wide and already overseas banks are no longer cutting margins and, in fact, rather increasing them," notes Berkeley.

The Eskom electricity crisis issue is another factor which has come into play and Berkeley said any finance deal for a new development will only be considered once electricity is confirmed - a process which takes some four to six months longer than previously, but can be managed. This is also compounded by the slow zoning process that often takes years for the approval of new developments.

"This is a double-edged sword which is unfavourable for new developments, but exceptionally good for existing properties in this market where strong tenant demand exists," said Berkeley.

As a result, Berkeley expects to see an increase in revamps and ‘brownfields' developments.

"We can certainly expect a slowdown in the supply of new developments," he added.

Meanwhile, property analyst Leon Allison of Macquarie First South, has a different take on big purchases in the listed property sector. Also quoted in the PLSA News, Allison said consolidation and corporate activity is likely to continue in the listed sector because big companies are not easily finding direct property investments that make sense right now.

The alternative, he said, is to buy other listed property. Several deals are lined up, said Allison, but he cautioned they will not go ahead unless they make sense to shareholders.

Listed property companies are "struggling to find suitable direct and unlisted property acquisitions that are financially viable", he said.

Get commercial property news by email

Free alerts when we publish — pick a focus or get everything, unsubscribe in one click. Subscribe »