Jeffery Wapnick is talking about mini revolutions in the investment property sector. Central Business District (CBD) revolutions to be precise.
You better listen. This dude is on top of his game. Wapnick is one of the best property entrepereneurs in the country who stood by the Pretoria and Johannesburg CBDs through and through and has at that made zillions.
Forget the mind boggling numbers –a total return of 34.7% on investment- coming out of Wapnick’s JSE listed property fund, Premium Properties. Look closely into the commentary alongside those numbers for the year ended February 2013. You might just land the formula to hop onto the property investment train, if you had missed it.
Fact is, a significant portion of South Africa’s wealth was generated out of dealing bricks and mortar accommodation. This is confirmed in a number of fresh studies. The latest Visa survey of the South African Middle class found that fixed property remains one of the most favoured forms of investment amongst South Africans even though it has lagged behind other asset classes over the past five years or so.
When asked what assets they own, 52% of respondents in the Visa survey said property, the highest of any asset class. This was followed by fixed income deposits (37%), shares (25%), bonds (9%) and private equity investments (8%). A survey of South Africa’s top earners -TopEnd 2013 Survey conducted by RamsayMedia Research Solutions (RMRS), suggested that 42% of South Africa’s top earners own more than one residential property and 3% own six or more properties.
Granted, the post 1994 investment property investment train has gone some distance and appears to be largely tired. The double digits returns in residential property sector, seen in the late 1990’s and deep into the 2000 are gone and may never return any time soon. Commercial property; offices, shopping centres and industrial property has also cooled off in the post financial crisis era. And banks are no longer dishing out those 100% mortgage loans.
So you are asking yourself; what train are we on about? Wapnick has some answers. There is something called listed property. It is a distinct asset class which offers the best of both worlds; that is equities and fixed property. Wapnick runs a listed property fund, Premium Properties valued around R4.7bn. Essentially this is a portfolio of properties bundled together to behave as a unitized asset. The asset is then sliced into millions of units which are traded on the JSE. This allows you to participate in the asset.
Under normal circumstances you wouldn’t even dream of owning a large office building or a block of flats. But you can gains an exposure into a portfolio with some of the most prestigious properties in the country by buying a unit on a JSE listed property fund. A good example is Growthpoint Properties, I JSE listed property fund valued around the R55bn mark and featuring the V&A Waterfront in the portfolio. Growthpoint currently trades at R29.10 per unit. In theory you can buy a piece of Growthpoint for about R29.10.
Premium Properties is currently trading around R20.00. There is something special about this property fund. Of all the JSE listed property funds Premium Properties is the only one which offers significant residential sector exposure. In its R4.7bn portfolio which generate more than R500m rental income, Premium Properties generates 28,7% of the rental income from residential properties. This is something of a marvel in South Africa where mainstream property players tend to shy away from the residential sector because of its management challenges. A block of flats does require more hands on management. Unlike an office property which can feature one large tenant, a block of flats will have hundreds of tenants. This means the investor must manage hundreds of individual leases.
While an investor in an office or industrial property sleeps well knowing that he has concluded a long term lease with a single tenant, the risks are also high here. If that one tenant goes bust there is major crisis. In a block of flats tenants come and go but there is no chance that the property manager will wake up one day with a suddenly vacant property. Add the massive shortage of residential property for the middle income earners in South Africa, you have a winning investment formula, if you can get it right. The vacancies in Premium Properties portfolio is telling. On 28 February 2013 total vacancies stood at 20.8% which is a scary figure. But the figure includes vacancies of 9% in buildings held for redevelopment. Office vacancies stood at 12.4%, retail 3,3% and industrial 2.4%. Vacancies on residential property stood at 1.9% and 0.3% when you take out properties held for redevelopment.
Premium Properties has a huge exposure on the Pretoria CBD and to some extent to the Johannesburg CBD. Wapnick is taking advantage of the all the government offices which are located in around the Pretoria CBD housing multitudes of workers. The portfolio has a huge commercial property exposure – offices 27%, retail 33% and industrial 10% of rental income. In the latest financial results Wapnick points out a factor which could further boost the Pretoria CBD. “Cabinet’s decision to locate government departments in city centres has contributed to a resurgence of interest in the Johannesburg and Pretoria CBDs. Currently only five of about thirty five government departments have embarked on this process, so it is poised for further growth.”
Added Wapnick “Our retail is trading exceptionally well with a current low vacancy rate. Relatively high trading densities are achieved, which has led to a return by a number of the large food and fashion retailers to the city. Currently, the CBDs are taking lettable space from established shopping malls, especially in the east of Pretoria because of the significant growth big named retailers can achieve here in the CBD.
One of the advantages is that the cost of occupation is much lower. The utility costs in a shopping centre are much higher as there are no common area charges associated with high street shops”.
“There is a notable commitment from tenants to the city through their continuous upgrading of stores. We are confident that these redevelopments and upgrades will pay dividends for our unitholders in the long term,” he continued.
Premium Properties has been beefing up its office and residential portfolios within the Pretoria CBD. On the office front the company has done massive upgrades. This includes the upgrade of the Protea Towers, an office block in Pretoria CBD which was completed in July 2012 for a total cost consideration of R15.9 million. The upgrade of Die Meent’s (Centre Walk), with a 5 258m² retail component, also situated in the Pretoria CBD was completed in November 2012 at a total cost consideration of R43.2 million.
On the residential front the company completed the R59.7m redevelopment of the mixed-use property, Eastway (Silver Place) in December last year. Situated in Silverton, Pretoria, the property consists of 82 new residential units. Construction of an additional residential block at The Fields in Hatfield, Pretoria, will create a further 87 residential units and 87 parking bays at an estimated cost of R68.9 million. This development is scheduled to be completed in November 2013.
The upgrade of the Pavillion in Sunnyside, Pretoria at a total cost consideration of R8.3 million was completed in March 2012.