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THE WINNERS - Smart Money Cleans Up !

  02/07/10 16:37, by Len, Categories: Investment Management, Property Investment

Source: Article by Ian Fife of the Financial Mail

It's feeding time for investors phase of the property cycle. They are the experienced ones who saw the slump coming, put their cash reserves aside and waited. Despite high-profile distressed projects, such as Pinnacle Point, now emerging it's been a disappointing time, particularly for big commercial property investors. "There have been few good properties coming onto the market," says developer Mike Crawford, who has been waiting for bargains since late 2007. This is partly because most investors and lenders have been prudent in their exposure to property. The number of forced sales reflects the enormous growth in the property market over the past decade.

Despite its volatility, the property market is recovering from nearly 40 years of under-development. The recent slump in house prices was me rely an interruption in this recovery, which could continue for the next decade.

SA has been left with fewer deep-pocketed, skilled developers who can swallow the large distressed property developments since the major property crashes of the 1970s and 1980s. A bank which might end up, for example, controlling the V&A Waterfront can turn to listed fund Redefine and Investec for a joint venture. Their terms would be tough, limiting their risk and maximising their own upside profits.

There are a handful of investors and developers who could partner with banks in multimillion and billion-rand individual projects. They include Jonathan Beare's Zenprop, property investor Ellerine Brothers and Atterbury.

Strong regional developers will provide the skills for the smaller distressed properties. "But there are so many golf estates in trouble that investors and developers will run a mile from them," says one property dealmaker.

The larger developers might be reluctant to get involved in rescuing developments, though. "The banks offer us wonderful terms to start with, like deferred servicing of debt and low rates," says Atterbury CEO Louis van der Watt. "But after a while they pressure you for higher interest payments and to put some cash into the project. We are not particularly interested in getting involved in these sort of deals."

Investec Property (IP) is likely to gain the most out of this clean-out and the subsequent slow upswing of the next decade or so. This subsidiary of specialist bank Investec was created in the early 1980s. It has built up the most experienced property team in SA with young, rising talent.

When other banks intent on focus and leanness lost interest in property, Investec kept IP as an integral part of its operation and profits. "Structures follow people. People don't follow structures," says Investec CEO Stephen Koseff.

With the parent company's big balance sheet behind it and major profits of its own - R440m in 2009 - IP has financial firepower.

Like Crawford, IP prepared for the downturn. "We sold all our developments [in progress during 2007] when we saw the downturn coming, including our interest in [listed property fund] Growthpoint," says IP CEO Sam Hackner. "But we kept a good pipeline of properties that were well priced."

IP also sold Investec's property administration business with Growthpoint's external property manager, which it owned, to Growthpoint for R1,6bn.

But IP has the money, capacity, and financial, development, dealmaking and project structuring skills to absorb a large new pipeline of properties. Already IP has built a trading and investment portfolio of R3,1bn in SA. It also has a further 375m (R4bn) offshore in its Investec/GLL (a German institutional investor) joint venture fund.

Hackner says IP will snap up all types of properties "except developing the buildings on residential properties, unless potential returns are eye-watering". Some properties it will buy at a discount, hold and sell over time. It will convert properties from one use to another. It will also enter into joint ventures with other developers and create property funds for its clients and other investors.

It is absorbing properties of defaulters for future development in collaboration with Investec. For instance, it has cherry-picked Abalengani's land portfolio as a start. "We don't have to take these properties into Investec," says Hackner. Instead they will go into special purpose vehicles so "we can nurture the properties for ultimate sale or development".

Some of these will find their way into a new unlisted fund that IP will be launching for institutional investors in SA this year.

"In December 2009 our Big Ben property fund in the UK was launched for local and international clients," says Hackner. "But there's no rush. We think the shake-out has at least a year to go. The object of this game is to optimise, not maximise."

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