The JSE property sector is being showered by black controlled asset management companies which at surface level suggest Black Economic Empowerment (BEE) progress but is causing consternation among ardent observers.
The latest addition into this trend came from the direction of Arrowhead Properties through an interesting BEE transaction. Arrowhead has reached an agreement to acquire Indite Property Fund, a 100% black owned and black managed property company.
The JSE listed property fund, Arrowhead, will take over 100% ownership of the Indite property portfolio for a total purchase consideration of R178 million which will be settled with a combination of Arrowhead units and cash.
On the finalisation of the transaction, Arrowhead will transfer its government tenanted buildings, valued around R390 million, into the Indite portfolio. This portfolio will be externally managed by a 100% black-owned asset manager, Indite Manco, under the leadership of Thomas Matlala. Arrowhead said this should enable Indite to enter into longer term leases with Government.
While different in quarantining the government targeted portfolio from the rest of Arrowhead’s portfolio, the arrangement mirrors a couple of other initiatives which have entered the JSE in the recent past. These can be sighted within Rebosis Property Fund, Dipula Income Fund, and Delta Property Fund. These are BEE initiatives which in entering the equities market have diluted their black ownership. To make up for this dilution they feature black owned management companies (Mancos). Rebosis features Sisa Ngebulana’s Billion Group as an asset manager while Dibula has Saul Gumede’s Dipula Asset Management Trust and Delta has Sandile Nomvete’s MPI Asset Management.
Some observers have labelled this a clever scheme to get around the stringent BEE demands required to participate in government property deals. Critics say this arrangement will rob the ownership factor of the BBBEE scorecard.
Established property funds which remain largely white owned and operated have largely been locked out of government property dealings. This was meant to allow emerging black landlords some space to grow. Under the direction of the department of public works (DPW), government is a significant market maker in the commercial property sector boasting a portfolio valued around the R400bn mark and a couple of billions of rands in annual lease deals. The DPW has positioned itself as a facilitator of BEE in the commercial property industry through affirmative procurement that favours black landlords.
However BEE regulations come with a special clause for the asset management industry. This clause gives black owned asset management companies some leeway even when the portfolio managed is not black controlled. This makes perfect sense for the asset management industry where the raison detre of operators is to manage assets on behalf of clients. The emergence of these 100% black owned Mancos in the property funds sector is exploiting this clause, a loophole if you like.
Where the property funds sector is concerned the movement towards black controlled asset management is seen as exploiting a loophole because it is not a natural feature of the sector. The general wind in the listed property sector is blowing the opposite direction. Property funds have been doing away with the third party asset management model. The two biggest property funds on the JSE, Growthpoint Properties and Redefine Properties, have bought back their asset management contracts. Their reasoning is sound. The separation of the ownership of the asset base to the Manco comes with serious problems, mainly misalignment of interests between the Manco and investors in the asset. Growthpoint bought out Investec’s asset management contract in 2007 for about R1.57bn. In undertaking this transaction Growthpoint said “This transaction will result in these functions (management) being performed internally by Growthpoint, which will eliminate perceived conflicts of interest arising from the current external management model” The group added that “International investors predominantly favour internally managed property funds over those which are externally managed. Growthpoint is preparing itself for the introduction of the REIT structure in South Africa. In a REIT environment most property funds are internally managed.” The REIT movement is already here and so one might ask: Why are some JSE listed property funds still establishing independent Mancos?
Whereas the affirmative action policy of the DPW is designed to promote the development of black landlords, the people promoting the black controlled Mancos hope to participate in the DPW programme on a service ticket. The argument is; as service providers, asset managers have control over the behaviour of the asset base even though they may not have majority ownership of the asset. The asset managers can drive the asset to benefit other pillars of the BBBEE scorecard and mainly preferential procurement in areas of property management.
Detractors are having none of this. They argue that this movement will come to dilute the objective of developing independent black landlords, not the type which is being baby seated by established entities. They argue that the black controlled Manco’s which hosted in established property funds will serve to crowed out genuine black landlords in the public sector if they are given a weighty BEE ticket.