Government leases not too risky

In addition, some large, established listed property funds have been keen to offload government-tenanted buildings, citing the risk of rental arrears and late payments as key concerns.

But there's a new breed of JSE-listed property companies, most with strong BEE credentials, that are profiting from this sector.

These include Motseng Investment Holdings' spin-off Delta Property Fund; Cape Empowerment's real estate arm Ascension Properties; lawyer-turned developer Sisa Ngebulana's Rebosis Property Fund; and industry veteran Gerald Leissner.

All four are relatively new listings and all, with the exception of Arrowhead, are substantially black-owned and managed.

However, Arrowhead earlier this year announced the R178m acquisition of Indite Property Fund, a 100% black-owned entity into which all Arrowhead's government-tenanted properties will be transferred.

While results released so far this year show that the four property counters have all achieved, or exceeded, pre-listing earnings forecasts, all are still trading at a discount to the rest of the sector.

Analysts say it appears the perceived risks associated with government-tenanted buildings, believed to be worth R1,2bn a year in rental income, may be overstated.

Longer leases for BEE companies

Coronation Fund Managers property analyst Anton de Goede says the fact landlords with empowerment credentials tend to secure longer leases with government is important from an investor point of view, as longer leases translate into security of tenure and more predictable income streams.

Government will typically sign leases of five to seven years with empowerment entities versus the two to three-year industry norm.

De Goede says government leases an estimated 3,000 buildings from private landlords on a national level, of which only around 10% are owned by black landlords. "That illustrates the scope of the investment potential for BEE property entities," De Goede says.

Though Arrowhead (both A and B units) and Rebosis have had stronger share prices than Ascension and Delta, all four stocks offer relative value versus the listed property sector.

Last week, Arrowhead and Rebosis were trading at forward yields of 7,3% and 7,5% respectively. Though that is still a sizeable discount to the sector's average 6,2%, Ascension and Delta are trading at forward yields of 8,3% and 8,1% respectively.

Investor support

De Goede says Arrowhead and Rebosis may have had stronger investor support as both already have a full 12month trading record on the JSE.

De Goede says each of the four government-tenanted portfolios has a slightly different focus in terms of building size, location and quality. Each fund is also exposed to government-tenanted space to varying degrees.

While only 20% of Arrowhead's lettable space is leased to government, the other three exceed 50%. Delta has the largest exposure to government tenants at 69% of its total portfolio.

Delta co-founder and chief executive Sandile Nomvete says though the large fund managers supported Delta's initial public offering and subsequent capital raising, other investors were probably waiting in the wings until Delta proved it could achieve its pre-listing forecasts.

Nomvete says there's still plenty of potential in the government-tenanted space, as one can still buy A-grade buildings at attractive yields of 10%. That compares with around 7% for buildings leased to the private sector. Government tenants are also paying better rental escalations than their private sector counterparts: 7%to 9% a year versus 5,5% to 6,5% a year.

However, the days of government tenants being satisfied with old, dingy offices are over. Says Nomvete: "Government rightly wants value for money, just like everyone else. Landlords who don't look after their buildings will lose out.''

Nomvete concedes government is not an easy tenant to deal with. "Government tends to be management intensive. Sometimes you have to physically collect your rent. But we have 14 years' experience in dealing with public works, which has enabled us to put effective systems in place to manage rent collection issues.''

He says it appears that public works is sorting out many of its problems. "We are already seeing lease renewals becoming a lot more structured and transparent.''

Source: Financial Mail via I-Net Bridge