Greenleaf Property Developers

Foreign investment in South Africa's property sector was one of the hot topics at the fifth SAPOA/Investment Property Databank annual property investment conference held in November.

Property economist Prof Francois Viruly of Viruly Consulting says South Africa's commercial property market is too small in terms of quality stock for its existing local players let alone foreign players. "This means that local players in this sector are looking elsewhere," he said.

The fact that South Africa's listed property sector has been largely ensnared by South African institutions, especially pension funds, and unit trusts, was then discussed at the conference as a further impediment to investment in the sector. Just take the Public Investment Corporation (PIC), which owns approximately 20% of SA Corporate Real Estate Fund and Growthpoint Properties.

This effectively moved the conference's focus from attracting foreign interest to the finding of new investment markets for local players. As Viruly succinctly put it: "The question is, do we go to developing countries or the developed world?"

Discussions on where to invest offshore centred around the decrease in the prices of listed property in Europe and the UK which have seen their listed property companies trading at substantial discounts in net asset value, thereby enabling some South African listed property companies to make offshore investments. These companies include Diversified Property Fund, Redefine Income Fund and Sycom Property Fund.

It was agreed that the advantage of investing in the more developed economies such as the US, Asia and central Europe is the well-established nature of their markets while the advantage of investing in developing economies is their accelerating growth rate, albeit at the challenging cost of learning the lay of the land. Overall though, warnings were issued that offshore investments carry risk in the form of currency.

When it came to what South Africa's commercial property sector would have to do in order to really attract foreign interest and maintain local interest, it was agreed that it would need a bigger market and more investment-grade property stock. "If we can't grow our economy substantially, at about 7% to 8%, the commercial sector will look elsewhere," said Viruly.

To put it into context, the South African listed property market contains approximately 20% of the country's commercial property assets as opposed to Australia, which contains 80%. To grow South Africa's listed property's commercial assets to 40% would require a substantial amount of the country's commercial property assets to be released, which the big insurance companies seem loathe to do.

Despite the change in focus, some heavyweight participants at the conference like Andre Stadler, managing director of Catalyst Fund Managers, Mike Flax, an executive director of listed property asset managers Madison Property Fund Managers, and Craig Ewin, CEO of the South African Corporate Real Estate Fund, remained focused on attracting foreign investment.

Stadler expressed that he felt more work had to be done on making foreign investors aware of South Africa's listed property sector and that it was essential that South Africa exchanges the property loan stock and property unit trust structures for the Real Estate Investment Trust (REIT) structure used in the US and Europe.

Flax said more had to be done to educate foreign investors on the great performance of South Africa's listed and physical property and Ewin said South African Corporate Real Estate Fund was putting effort into profiling SA Corporate internationally to attract foreign interest. - Kara Michaels