Delta Property Fund: shifting mind sets

In building one of the few black controlled commercial property empires in the country, Sandile Nomvete and his team, at Delta Property Fund, are not only set for massive wealth accumulation but they are becoming discourse shifters.

A brave thesis is emerging around their operation. JSE listed black economic empowerment (BEE) property funds should command a premium investment rating and not suffer the apparent discount due to their above average exposure to government tenants.

It is a brave submission that promises to shift a poisoned discourse. The submission can be read from the maiden financial results of Delta Property Fund, a BEE styled entity which debuted on the JSE in November last year. The thesis is not only arising from the numbers produced by Sandile Nomvete and his team at Delta but from Nomvete’s words.

In announcing a phenomenal performance posted by Delta during the year ended February, Nomvete makes remarkable comments. “The sovereign underpin and relatively long tenure of government leases make Delta’s portfolio largely defensive,” said Nomvete.

Delta produced an annualised return of 17.4% to investors who have stuck with the company since listing in November last year. Delta’s R2.1bn portfolio came out with occupancy of 95.6%. This is remarkable for a portfolio of 20 properties that has 97% exposure to the office sector and only 3% to retail assets.  A view of the broader office market will show that the sector is reeling under high vacancy rates with many listed property funds quoting double digit vacancies. Delta is on to acquisitions that will add assets valued at R2.3 billion. This will more than double the fund’s asset base to about R4.3bn.

Nomvete said “We remain confident of the sustainability of government leases going forward. Delta’s empowerment credentials position us well for future value enhancing acquisitions and prudent growth as and when opportunities arise. We are on track to meet our forecast fund size of R7 billion by 2017”.

Nomvete is promising a distribution growth of 20% over the next two years which again will place Delta far ahead of its peers on the JSE. Many other distributions of listed property funds are set to be muted over this period. Nomvete said delta is well positioned to pick up value adding assets within its market focus while seeking opportunities to augment their current focus through strategic diversification into quality retail and industrial assets.

Delta is part of a newish BEE wave within the listed property sector. The wave is made of an emerging group of property funds with a heavy exposure to government tenants that have entered the JSE over the past few years. This class can to a certain extent accommodate Sisa Ngebulana’s Rebosis Property Fund, Saul Gumede’s Dipula Property Fund and Thomas Matlala’s Indite Property Fund. These funds boast larger exposures to government tenants, arguably due to a somewhat subversive movement.

An affirmative action policy driven by the Department of Public Works, an administrator of government property dealings, has facilitated some shift in the mainstream commercial property sector. In line with the country’s BEE framework, the DPW policy favours black landlords. In many cases this came at the direct expense of established, traditionally white landlords. As such this movement has left behind a poisoned view of government as a premium tenant. Allegations of corrupt DPW BEE deals have not helped the situation. The market was arguably left with doubt about security of tenure in government leases.

But this should not be, at least not by the way of investment fundamentals. As a rule of thumb government, more so in politically stable polities, lives in the arena of low risk. The language deployed by Nomvete in his commentary veers towards this line of thinking. He deploys the concept of “sovereign risk” quite usefully. “The sovereign underpin and relatively long tenure of government leases make Delta’s portfolio largely defensive”.

He adds that “A large proportion of the office portfolio is leased to the National Department of Public Works and SARS under long leases, with average escalation rates of 8.45%. The office portfolio represents a 72% sovereign underpin to a substantial portion of the earnings and shields it from private sector risks such as tenant insolvency”

And he also makes the point that Delta has had to re-educate the market about the nature of government as a tenant. He acknowledges that the few mishaps that have marred the space have negatively affected perceptions.

But then truth is; government is a solid tenant that comes with stable and long term leases. That is the alpha and omega of property investments unless you take a view that the sky is about to fall on us, that is South Africa is at the brink of a fiscal catastrophe which is a debate for another day.

Politics aside, Delta offers a compelling value proposition supported by experienced property management skills. Nomvete and his team have been on this game since the early 2000’s and seems to have mastered it. It is easy to arrive at that conclusion if you look at what matters most in this game, the cost to income ratio. Nomvete pointed out that management’s focus on cost containment during the period yielded results, as the Fund reported a cost-to-income ratio of 18.78% well below the industry average.

From where we are seating, it is clear that Nomvete and his team are positioned as an interesting investment play, mixing social and commercial imperatives. The next question we have to address is: What happens if a non BEE suitor comes along?

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