More than any other section of the economy, the listed property sector of the JSE is faced with the challenge of sustaining the weight of its empowerment equity transfer initiatives. This will make it difficult, if not impossible, for the sector to meet the 25% black ownership target.
In this sector, a deal which gives black partners 10% equity in a property fund is diluted in no time as a result of the endemic practice of issuing paper to grow the asset base. Often, the paper issues come with a clawback offer which allows existing shareholders to maintain more or less their level of interests. But then for lack of capital, BEE partners fail to exercise their rights and the level of their economic interest and influence is diluted.
There is no shortage of examples to illustrate this point. Growthpoint, which emerged as the most empowered company in the sector in this year's TEC survey, is supposed to be sitting with direct black shareholding of about 16,5%, carried from two deals concluded in 2005 and 2006.
But Growthpoint has embarked on a paper issuing spree en route to becoming the largest property fund in the country, with assets of about R22bn. Its BEE partners did not take advantage of the clawback clause, leading to the dilution of Growthpoint's direct BEE shareholding to about 10%.
The problem could be solved with a liberal application of the "once empowered always empowered" principle carried in the codes. But BEE pundits say this will make BEE deals meaningless. It will mean new equity gets a free BEE ride.
Mechanisms must be found to ensure that BEE shareholders are able to retain significant ownership within these transactions, thereby ensuring they are able to exert the necessary influence to drive the transformation agenda within companies, says Thabo Ramushu, a director of property asset management house Meago Properties.
Funding structures should have clauses that allow BEE shareholders to utilise their existing equity to follow their rights and maintain their shareholding, says Ramushu. Alternatively, BEE shareholders should be given access to funders to solicit further capital to follow their rights wherein the investee company provides vendor assistance, he says.
Ramushu warns about the downside in this option. Where BEE entities approach funders for matters such as rights issues, structures could be created with substantial leakage occurring, says Ramushu. This is because funders would want to participate in the equity upside, he says. Unfortunately this scenario diminishes the economic benefit due to the BEE shareholder and introduces an element of fronting as the funder can strip out a significant amount of value under the auspices of funding a BEE transaction, says Ramushu.
Though Meago has shared the spoils of BEE through participation in two deals within the listed property sector, Ramushu takes a cautious view about the progress of BEE implementation in the sector. The progress has been slow and only half of the listed property companies have concluded BEE deals despite the existence of a sector-focused BEE charter, says Ramushu. Of the companies that have concluded BEE deals none has concluded the maximum 25% of the equity ownership as required by the charter, says Ramushu.
Ramushu's entity, Meago, participated in the 2006 BEE transaction which delivered about 7% of Hospitality Property Fund to a broad-based BEE consortium. Last year, Meago formed part of another broad-based BEE consortium which landed a 15% stake in listed property loan stock company Siyathenga Property Fund for about R184m.
A number of other listed property funds have concluded such deals over the past few years. In October last year Redefine Income Fund transferred 10% of its linked units to a broad-based consortium for about R548m. SA Corporate Real Estate Fund concluded a R636m BEE deal last year. The deal gave a consortium made of Wiphold and Kensani Properties about 11% of SA Corporate Real Estate Fund's linked units.
In addition to a string of BEE equity transfer deals concluded in the sector, an array of enterprise development initiatives have emerged in line with the broad-based BEE scorecard and charter requirements. Listed as one of the seven factors in the broad-based BEE scorecard, enterprise development is favoured as a critical contribution to mending SA's economic woes. This is where the foundation for entrepreneurship is laid. It allows for the development of a self-sustainable class of black businessmen as opposed to the opaque arrangement of giving away equity.
This is a principle where established corporations adopt small black-owned enterprises and offer them business opportunities and other critical support. In many cases the established group takes a minority interest in the small enterprise to ensure alignment of interests. The aim is to help these small enterprises grow to become independent and sustainable businesses, by which time the established group will withdraw.
"Through the creation of new businesses and unlocking opportunities, enterprise development ventures contribute more significantly to BEE than simply making equity available without any value being added by the new shareholders," says Redefine Income Fund CEO Brian Azizollahoff.
Redefine is one of the listed property funds that launched an enterprise development during the course of last year. This is over and above initiatives that comply with the six elements of the BEE scorecard like transferring equity to black groups.
Redefine's enterprise development initiative was done with a black-owned group called Mergence Africa. The two launched a joint venture called Mergence Africa Property Fund, which was given a property portfolio valued at R230m. Redefine holds 49% of the new fund while Mergence owns 51%. The portfolio will be managed jointly by Mergence and Redefine's management company Madison.
The Mergence deal follows the launch of the Dipula Property Fund by Redefine in 2006. Held 49% by Redefine and 51% by black-owned Dijalo Property Services, the fund was launched with an initial property portfolio worth R300m.
Redefine's sister companies, Hyprop and ApexHi, run their own initiatives. Towards the end of 2006, Hyprop launched R600m black-controlled Vunani Property Investment Fund. Hyprop owns 49,8% of the fund. The rest is held by the largest black property company, Vunani Properties.
ApexHi facilitated the creation of Isivuno Apex Properties, which was given the contract to manage Pretoria office properties worth R500m in the ApexHi fold.
Other recent enterprise development initiatives in the listed property sector include the African Capital Property Fund, launched in 2006 by a broad-based BEE consortium led by Zwelakhe Sisulu and the now delisted property fund CBS.
Enterprise development accounts for a total of 15% in the broad-based BEE scorecard and the charter. In addition the property charter also requires that property companies should commit to 35% of disposals of any physical properties to BEE entities.
However, many listed property companies still prefer to auction their properties, says Ramushu.
Some of the listed property companies try to overcome this principle by doing enterprise development initiatives, he says. Conceptually, that is commendable in terms of skills transfer, but they often maintain a significant shareholding in the entity, limiting the entry of independent black players, says Ramushu.
Also these companies benefit indirectly from the enterprise development initiatives as shareholders, he says.
