Vukile, listed by Sanlam and other, smaller, promoters in 2004, was originally greeted with scepticism by many investors as it was felt that the underlying property portfolio, much of which came from Sanlam itself, was of a secondary quality, riddled with problem buildings and too expensively priced.
It was the price Sanlam paid - in its case possibly unfairly - for the early listed funds in the 1980s, which were usually made up of everybody's second-best properties. Immediately after listing, the price fell below the listing price.
Subsequently, it seems that the market's sc epticism was misplaced. The company's management restructured the portfolio somewhat, sold some problem buildings and rehabilitated others, took over the MICC Property Fund (also from the Sanlam stable), was an early mover in securitising debt to lower interest charges, grew distributions healthily and communicated regularly with the market.
MICC is still listed due to the prolonged and messy legal objections of a minority shareholder holding 0,1% of the company. A high court ruling has since authorised Vukile to acquire the shares.
Combined with MICC, Vukile is a R3,5bn, 79-property company, with a gross lettable area close to 1m². Retail makes up 52% of the fund (in line with the sector average), offices 32%, and industrial 16%.
Vukile does not have a portfolio of trophy assets. It has an eclectic portfolio of predominantly A-B grade assets. The fund owns buildings in Namibia, and is prepared to invest in peripheral and rural areas.
An increasing number of property funds are now buying properties in these areas as pricing is often more attractive, and the asset is more likely to be dominant with less chance of new developments to lure tenants away. Some of these areas may carry higher risk if their economic base is not diversified or sustainable.
Vukile's largest holding is the highly successful 20 681 m² Phoenix Plaza in Durban, with a value of R254m. This is perhaps Vukile's trophy asset. The Plaza has recently been expanded and upgraded. The other major holdings are a 50% share in the 39 949 m² Pine Crest Centre in Pinetown with a value of R143m ; the Louis Leipoldt Hospital in Bellville valued at R145m; and the 32 339m² Durban Embassy building valued at R140m.
Vukile also owns the 51 309 m² Randburg Square, with a value of R141m. This was a property that came into the portfolio with an exceedingly high level of vacancies that were not paid for. Entire floors of offices were empty. Vukile has since reduced the vacancies considerably, to just more than 10%.
Vukile owns the Dobsonville Shopping Cent re in Soweto. This was Soweto's first centre. There are now a number of competing retail cent res in the area, which could place the centre at risk. Nonetheless, Dobsonville was recently extended due to demand.
Vukile owns buildings worth R237m in Namibia, making up 8% of the combined portfolio. The rest of the portfolio comprises smaller retail, office and industrial buildings.
Vukile has been active in disposing of non-core properties and engaging in developments, expansions and acquisitions, such as in the case of Phoenix Plaza, Dobsonville and Kings Road. Recently, the fund announced the development of a centre in Limpopo, north of Groblersdal.
In the interim period to September 30 2006, Vukile's distribution was 10% higher than the 2005 interim distribution. Growth may have been higher were it not for some one-off expenses.
Vukile is relatively safe from hostile corporate activity due to Sanlam's ownership of more than 30% of the company.
Sanlam Properties manages the portfolio. Vukile, otherwise, is unaffiliated within the listed property universe. Vukile and MICC's combined market cap is R3,5bn, which makes it a mid-sized fund, possibly making it an attractive acquisition, especially for a fund concentrating on non-prime, nonmajor metropolitan-area properties. However, any corporate action would require Sanlam's prior agreement.
Vukile is not a low-risk listed property investment. As its building quality is not prime, it could be vulnerable if the property market turned downwards, as tenants would probably be drawn to better- quality buildings which would be offering more attractive rentals. Tenants are also likely to be more marginal businesses.
The same factors improve the potential upside from Vukile. Because of their low rentals, variable occupancies and weak valuation base, these properties can do particularly well when the market improves.
If property fundamentals continue to strengthen and rentals in the cheaper segment of the commercial property sector carry on rising off their low base, this could be the case.
