The SA listed property sector has been one of the best-performing sectors on the JSE over the past few years. Income returns are steady and have not been less than 10%/year since 1995.
Though capital returns are more volatile, they have been buoyant since 1999 - with the exception of a small capital loss in 2001 when the prime interest rate hit 26%. Total returns from listed property stocks exceeded 50% in 2005 and hit almost 30% last year.
WHAT IT MEANS
 Since 1995 income returns have not been less than 10%/year
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The sector has also largely withstood the general stock market weakness over the past two months, a resilience reflected by the generally solid financial results reported by listed companies over the past few weeks.
It is no wonder then that these companies continue to invest large sums in properties and that the banks are scrambling to lend to them to fund their expansion. Absa Commercial Property Finance (Absa CPF) has successfully positioned itself as a leading funder of the JSE's listed property sector over the past three years. From an exposure of only R1,7bn in 2004, the listed book is now worth more than R5,3bn.
SA's listed property companies take the form of property unit trusts and property loan stock companies. Though these companies clearly use their equity capital, they also raise debt finance to fund their property portfolios. These loans to listed property companies are typically secured against fixed property.
Lisa Forshey, head of Absa CPF's listed sector and key accounts divisions, says it requires a different focus to deal with listed firms, which are often high-profile companies. "Listed companies have access to a wide range of debt and equity funding opportunities. Lending to them requires a different approach."
Absa CPF lends to 15 of the listed companies and has established a dedicated team of executives and consultants to deal with them. Crucially it has taken the lead in creating innovative products for the sector, which Forshey believes gives the company an edge over its competitors.
Absa was the sole arranger for the first two commercial mortgage-backed securitisations in the sector - R850m for Pangbourne in 2004 and R770m for Vukile in October 2005.
Though securitisation offers fee income, it reduces annuity income. Absa CPF's listed sector head Jason Lamb concurs: "From an annuity income perspective, it would have been better for us to offer normal on-balance sheet debt, but rather than lose this debt we have explored launching innovative products with Absa and Barclays Capital."
The bank has a range of other capital and debt market and treasury products, aside from straight balance sheet lending and securitisation. These include derivative products and cross-selling a suite of services with other divisions within Absa Capital and Absa Corporate & Business Bank, of which Absa CPF is a part.
With the listed property sector falling under the property charter, these companies have also been obliged to bring in black economic empowerment shareholders. And Absa CPF has been one of the key funders in transactions facilitating BEE ownership.
"BEE deals are higher risk but also generate margins that compensate for the risk," says Forshey, explaining that the listed units of the property companies served as security for BEE deals. Some of the companies whose BEE deals Absa funded include Pangbourne, Growthpoint, Hospitality, and SA Corporate.
The reason for the focus on the listed sector is two-fold. Firstly, the growth potential of the sector is significant. Only about 20% of physical buildings in SA are estimated to be held by the listed property sector. By contrast, the comparative figure in Australia is over 80% ; this offers potential opportunities to banks.
Secondly, funding to the sector is generally less risky than to unlisted companies due to the low level of gearing in the sector, which averaged 29% as at the end of July.
Says Lamb: "Since we lend against a portfolio the underlying contractual rentals can be forecast, particularly for the first three years when risk is normally highest. Lending against a portfolio is also less risky than funding a single project."
But with lower risk comes lower margins, which banks only make up to a limited extent by fee income from structured products. As it is, margins in the listed property sector have been the most squeezed of the various commercial property lending classes.
"For listed companies the single biggest expense is the cost of funding and they are always on the lookout for cheaper capital," says Forshey. Recent interest rate hikes have swung the balance back towards issuing equity as a way of raising capital by listed property firms.
How to respond? "We have to continue to be innovative and come up with products that provide cheaper funding to the sector," Forshey says.
