China`s big 2012 bets: South Africa rocks - China perspectives | Moneyweb.com

China`s big 2012 bets: South Africa rocks - China perspectives

China's big 2012 bets: South Africa rocks

Asian giant set to snap up more juicy assets in Africa, aiming for double-digit returns.

 

Many investors are looking to Asia, in particular China, for returns as the world heads into yet another tough year. China, meanwhile, is foraging in Africa for opportunities to generate superior returns.

Most visible on its list is South Africa. The China-South Africa burgeoning trade relationship is in the spotlight yet again, with news just before Christmas that China's sovereign fund has acquired a sizeable stake in Shanduka.

China Investment Corporation has reportedly paid a staggering R2bn for 25% of the unlisted investment holding company with interests in coal mining and other industries. Shanduka is a familiar name in business circles in South Africa. Its charismatic chairman, Cyril Ramaphosa, was widely tipped to succeed Nelson Mandela as South African president.

The Chinese fund manages about $410bn of China's $3trn in reserves and has investments in Chinese banks and French energy companies, among other entities. Clearly it expects Shanduka to deliver lucrative returns. The China fund earned just under 12% last year on its overseas portfolio investing mostly in high-risk assets, according to the Wall Street Journal.


2012: Expect lots of China-Africa deals  

We can expect big money deals involving the Chinese government and related financiers and South African companies to become increasingly common in 2012. Developed markets continue to look unattractive.
South Africa has a relatively sound regulatory environment, developed business infrastructure and entrepreneurs who are enthusiastic about unlocking returns across Africa. China spotted the obvious opportunities in hooking up with South Africa in its African forays some time ago.

China welcomed South Africa as the fifth member of its sexy Brics club along with Brazil, Russia and India this year. It has trumpeted the benefits of South Africa as an access point to a massive continental market of 1bn or so people.

The man who coined the term Bric, asset management heavyweight Jim O'Neill of Goldman Sachs Asset Management, was less convinced. He said on broadcasts televised in China when Brics delegates met on the Chinese island of Sanya in April that South Africa is effectively an economic minnow compared to the Bric countries. (For more on that, read China's favourite African son can do no wrong.)

But, criticism about South Africa gaining entry to the Bric clique this year failed to dampen China's enthusiasm for South Africa. Standard Bank (JSE: SBK), an adviser to Shanduka and a major deal-maker in Africa, recently declared that South Africa and the rest of Africa are "flavour of the month".

China's appetite for African assets, for now, appears to be insatiable. Earlier this year, Standard Bank released a forecast that China's investments in Africa would leap 70% on 2009 levels, to US$50bn by 2015.

There are no signs that this target won't be met. China is already Africa's largest trading partner, with China-Africa trade volumes for 2011 expected to come in at more than US$150bn (about $126bn in 2010). They are expected to double to US$300bn in four years.

Standard Bank has the inside track on what investors, and the Chinese in particular, are up to in Africa. It has banking tentacles across Africa.

It is also partly owned by the Industrial and Commercial Bank of China (ICBC) through a 20% stake acquired for US$5.5bn in 2008. Standard Bank has partnered with ICBC, the world's largest bank, to fund projects in Africa.


Africa's investment returns tantalise

There are many other signs that China is only just getting started with its investment programme on the continent. Ramaphosa said of Shanduka's latest deal, which saw China' s sovereign fund buying shares mainly from Old Mutual and Investec, that the plan is to explore future opportunities in South Africa and elsewhere in Africa.

In November the Wanning Declaration emerged from a meeting of more than 400 diplomats, politicians, researchers and business representatives from about 40 African countries in Wanning in the Chinese province of Hainan. Encouraging Chinese investment in private enterprise in Africa is a major objective in the new agreement.

Chinese and South African politicians are likely to get closer as a new parliamentary exchange mechanism is bedded down. A direct SAA flight from Johannesburg to Beijing, from January, will help oil the wheels of friendship.

In the Seychelles the political relationship is now so cosy that China is even considering taking up the offer of what effectively would be its own port. China refuses to acknowledge that it would be getting its very own African naval base.

Many of us will not like it that Chinese operators are likely to further entrench themselves across the continent. With a reputation for undercutting African firms and using their own cheap Chinese labour instead of creating jobs in communities, the jury is out on whether Chinese investment and loans in Africa are actually good for Africa in the long run.

China also has a reputation for aiding and abetting the continent's evil-doers in business. China's controversial diamond mining activities in Zimbabwe - with two mines this month placed on the United States' sanctions list - are a prime example.

But for some elite operators, like South Africa's Ramaphosa and Mugabe's diamond dealing pals, the opportunities on the horizon undoubtedly glitter as China explores the African continent for higher returns than it could expect elsewhere.

SA needs an education lesson from the Chinese - China perspectives

SA needs an education lesson from the Chinese - China perspectives

China perspective - Jackie Cameron SA needs an education lesson from the Chinese

 

Time to fix South African education: the Chinese way?

 

One of the ANC government's biggest embarrassments is its abject failure to provide a high quality education to prepare young citizens for an economically productive adult life.  Now it has strengthened ties with China, South Africa would surely do well to follow many of its big brother's examples on the educational front.

Many people believe China's policy of opening up its economy to the world is a major factor in lifting most of its population out of poverty in three decades. But, there's a case to be made for its education system being just as significant a factor in its turbo-charged growth.

China's policymakers certainly believe education has been a vital backbone in its economic miracle and say as much in the country's 10-year education plan. "By means of the development of education, China has transformed from merely being a country with a large population to being a country with powerful human resources," it notes in the preface.

Although China gives itself a pat on the back for its education system, it is giving it a radical overhaul. This is with a view to bringing it in line with developed world standards as it aims towards being the globe's best and most influential in science, technology and other sectors of the economy, rather than just being known as the biggest and cheapest.

Still, what it has been relying on in recent decades certainly hasn't been bad, if you consider China's overall successes. World Bank data show:

·         China has a 94% literacy rate among people over the age of 15, while South Africa's literacy rate is around 89%;

·         China's poverty ratio has plummeted to below 3% of the population, while South Africa's stands at roughly a quarter of all people living below the poverty line;

·         Life expectancy at birth in China is 73 years, considerably higher than the 52 years you can expect to live in South Africa;

·         South Africans  earn more than the average Chinese - South Africa's gross national income per capita stood at about US$6000 in 2010, compared to China's of just over US$ 4000; and

·         About a quarter of South Africans who are able to work are unemployed, while less than 5% of China's total labour force is unemployed.

So, what are the Chinese getting right that we South Africans should emulate? Here are some obvious areas where we in Africa have room for improvement:

Education is as important as eating

The Chinese value education enormously. After an entire generation was deprived of a decent formal education in the Mao-led Cultural Revolution years of the 1960s and 1970s, there is a huge appreciation for the opportunity to learn and obtain qualifications.

China has instituted compulsory free education for nine years across the country and continually improved access to education in rural areas with the help of organisations like the World Bank and the UK's Department for International Development. Tibet is the first to offer 15 years of free schooling, including preschool, it was announced this week.

Vocational training and skills upgrading is a feature of China's system. Everyone - not just those who are academically able - is encouraged to get an education in order to be productive.

South Africans were also deprived of a quality education during those same Cultural Revolution years because of apartheid. Yet we don't have the same national enthusiasm for making up for it now.

There's a logjam in the system. We have new generation of young political leaders and government officials coming up through the ranks who don't have the inclination, or the wherewithal, to deliver a high quality education any more than their predecessors.

China spends at least 3.5% of its Gross Domestic Product (GDP) on education. South Africa spends a higher chunk of its GDP on education, but this 5% is seen as a rotten investment. Many blame the switch to so-called outcomes-based education.

In China, more important than the money is that education as a strategic priority is emphasised from the highest echelons of political power down to party committees and local governments. There's a feedback loop and consequences for officials who don't meet specific targets.

Popularising higher education

China encourages its citizens to dig into their own pockets to pay for the best higher education money can buy.  The Chinese save, save, save to put their only children through the best universities in China.

Those who can afford it, and who can bear to be away from their offspring for several years, send them to universities around the world. China is a major source of international university student intakes in the US and elsewhere.

Postgraduate qualifications are vitally important. Some argue that there are now too many Chinese students leaving universities with postgraduate degrees. Nevertheless, the appetite for higher education is a sign that university degrees are highly sought-after and valued.

Chinese leaders, like President Hu Jintao, regularly emphasise their own educational qualifications. Premier Wen Jiabao is constantly on the road, visiting education institutions and urging citizens to embrace the highest standards.

Perhaps it is time for some of our own political leaders to go to night school to improve their academic credentials and generally market the benefits of high quality education?

Respect

Chinese teachers are tough, strict, and have the power to discipline, with the sweetest young women turning into textbook tyrants.  What's more, their pupils are expected to respect them.

Use a bad word or sound slightly cocky to your Chinese teacher, and you can expect harsh punishment - usually in the form of even more homework or a cancelled school break. No doubt this respect for teachers helps keep pupils chained to their desks day-and-night.

South Africa has enormous problems with its teaching staff. Many aren't qualified. Some blame this on poor salaries.

Chinese teachers aren't particularly well paid either. Yet, in the main Chinese teachers take their jobs seriously and are seen as vitally important pillars of society.

Treat ‘em mean

In China, pupils who don't finish their work in the teaching session can expect to stay behind and continue on the project in your recess. Homework is a serious business; even five-year-olds can expect up to two-hours a day of reading, writing and arithmetic practice at home after a seven- or eight-hour school day.

The work ethic is incredibly strong among the Chinese young and it is paying off.  Chinese students caused a stir when they put their counterparts from Europe to shame in a computerised, standardised test of international student skills delivered by the Organisation for Economic Cooperation and Development.  China is moving up the ranks among countries publishing the most academic articles in science.

I'm not in favour of tortuous rote-learning. At the very least, though, there's a case to be made for getting into some kind of disciplined work routine in place so that it feels normal to roll up your sleeves and get on with it later on.

...

Buying vs building gap stretches

Buying vs building gap stretches

Building costs set to increase by more than 12% this year: Report

Building your own home at current building costs could amount to 29% more than buying an existing house. This figure is likely to increase in 2012 and even further in 2013.

Property analyst of Absa Home Loans, Jacques du Toit, says it is unlikely that the gap between buying and building will shrink any time soon and if it does it’s improbable that it will drop beyond 25%. The gap peaked at roughly 34% in the fourth quarter of 2010.


In mid-2007 the prices of existing and new houses met, but since then existing house prices dipped slightly in 2009 and started moving steadily upward. New house prices, however, continued moving upward from 2007 with building costs dipping slightly in 2010, peaking around 2011 and then moving sidewards.


Click image to enlarge

A report on building costs released in Q4 2011, forecasts that tender prices are likely to increase by 12.1% this year and a further 16.3% in 2013. The report was compiled by Johan Snyman of Medium-Term Forecasting Associates in conjunction with the Bureau for Economic Research of Stellenbosch University.
To read the full report click here>>

The tender price is what a contractor or developer will quote you in terms of materials, labour, factory costs and overheads and includes his or her profit.

The report expected an increase in building costs of 4.5% in 2011. It states that a weaker rand exchange rate implies higher local input costs of materials and construction plant prices.

Builders have little option but to pass these increases on in the form of higher tender prices. Snyman says tender prices rose by more than 14% in 2008, dropped by -0.9% in 2009 and declined by a further -0.2% in 2010.



Snyman says potential home builders would therefore do good to proceed this year rather than leave it until 2013.

Du Toit agrees that prices are likely to climb due to hikes in among others, building materials, transport and labour costs and equipment.

He says potential homeowners tend to focus on existing properties as they can pick them up at a relatively good price in the current climate and sellers are also more open to negotiation. Du Toit says this is very seldom the case with a new home or development as the developer brings the property to market at a certain price, having factored in his or her costs and profits.

FNB’s household and property sector strategist, John Loos, is of the view that building costs will not accelerate much this year and will continue to remain under pressure. FNB calculates what it terms a full title property replacement cost gap.

The gap measures the percentage by which the replacement price exceeds the average price. “What it would cost if you had to demolish, take away that structure and rebuild from scratch,” Loos explains.
He says that gap has widened and he doesn’t foresee much building cost growth this year. “We’re going into a slow economic period. As it is the existing market is over supplied and the replacement cost gap has widened to 20% which is quite significant in weak times like this.”

He adds he cannot see any significant recovery in building activity and therefore the pricing power of the building materials sector is going to be under pressure. “Whatever the building cost increase was last year, I don’t expect it to be much different this year,” Loos said.

...

Boomers worth their weight in gold

Boomers worth their weight in gold

Downsizing boomers could bring about a resurgence in the property market.

Although it is the Generation X population, which consists of adults between the ages of 31 and 45, that are leading the property market recovery, baby boomers are making their presence felt in the market, says Adrian Goslett, CEO of RE/MAX of Southern Africa.

Goslett says that as more and more South African consumers reach retirement age, downsizing boomers aged between 47 and 65 years old could bring about further resurgence in the property market. “With many of these homeowners having built equity in their homes over the years, as well as other investments, boomers may be the first demographic to move in the emerging market when other ages groups are still struggling to meet the stringent lending criteria required by banks,” he says.

Goslett notes that because their children have moved out of home, the boomer generation is expected to trade their suburban homes for lifestyle options that meet their current needs. This, coupled with that fact that many boomers are looking to buy additional property as an investment to supplement their retirement income, or are assisting their children in making property purchases, makes them a valuable asset to the economy. “Many of the real estate agents have baby boomer clients who already own property and are looking to purchase an investment or retirement property. A number of these buyers are purchasing property that they can rent out to generate an income or to move into once they reach the age where they wish to retire,” says Goslett.

Statistics show that the population demographic in South Africa sees baby boomers making up a much smaller percentage of the population than Generation X. Between the years 1950 and 1965 there were 13,5 million births in South Africa (baby boomers) compared with the 18,74 million births (Generation X) between 1965 and 1985. According to John Loos, FNB Home Loan Strategist, while the most noticeable increase in the property buying share was among the Generation X group who made up 28,1% of the total purchases in the first quarter of 2011, the Baby Boomers buying share increased to 21.17% of the total purchases in the first quarter of this year, despite being a demographically smaller group. The FNB Property Barometer for the third quarter of 2011 stated that 22% of all buyers gave downscaling with life-stage as a reason for selling their property.

Trends show that boomers tend to favour areas that attract a wide variety of people and they generally purchase property that is close to their original homes or primary residence. Boomers seem to like open-floor plans, lots of storage space and specifically his and hers master bedroom cupboards and gardens featuring decks. Other amenities on the must-have list include fireplaces and bars.

“The baby boomer generation has driven the South African economy for years and continues to contribute towards the property market’s recovery in their retirement. Many of these investors are looking at buying properties based on the rental income they will generate and not necessarily for their resale potential. The baby boomers are a very diverse group and cannot be described in generalities, but those boomers who are financially secure are actively seeking to buy property and they are taking advantage of the opportunities and value available in today’s market,” Goslett concludes.

* This article was prepared by RE/MAX

Redefine considers retail acquisitions

Redefine considers retail acquisitions - Property Moneyweb

And remains on track to deliver its earnings forecast and strategic objectives.

Redefine International Limited (RIN) released its interim management statement on Wednesday, in which it announced considerations for a number of opportunistic acquisitions in the European retail sector.

The company said that it would continue to be managed on a conservative basis with consistent income generation a priority. Despite the current economic challenges, the board was confident that the company remained on track to deliver its earnings forecast and strategic objectives set out in the reverse acquisition prospectus published in July 2011.

Occupancy in the portfolio remained unchanged at 95.0%. The proportion of the portfolio subject to CPI/RPI indexation or fixed increases remained broadly unchanged at 54.8%. Inflation in the UK remained well above the Bank of England's 2.0% target, benefitting rent reviews, which were subject to CPI or RPI.

Redefine said that the period since the company's year-end (August 31, 2011) had continued to be dominated by the eurozone sovereign debt and EU banking crises.

The uncertain and volatile economic environment that this had created continued to impact on the performance of the commercial property market in the UK and Western Europe.

Consumer confidence in the UK and Western Europe had been negatively affected, resulting in a significant reduction in consumer spending and a knock-on effect on retailer profitability.

UK retailers had generally reported poor to mixed trading conditions over the Christmas period with a number going into administration in December 2011 and January 2012. The company had exposure to two La Senza stores in Wigan and Harrow, both of which are earmarked for closure by the administrator. Occupancy in the UK retail portfolio at December 31, 2011 was 97.7% (including La Senza) or 97.4% (with the La Senza stores included as void). Although the company was maintaining occupancy, the general trend with lease renewals was that rental growth remains negative to flat.

Notwithstanding these tough business conditions, the company's underlying performance remained robust. The covenant strength of the UK Stable Income portfolio, strong performance of the Hotel and European portfolios and a very solid contribution from the Cromwell Property Group ("Cromwell"), the Australian listed property trust in which the company holds a 24.32% interest, have more than offset the weaker performance of the UK retail portfolio, illustrating the benefit of Redefine International's diversified portfolio to consistent income generation.

Asset management activities continue to focus on protecting occupancy and income to ensure that the company's historic cash distribution levels are sustained going forward.

Greg Clarke, Chairman of Redefine International said: "After assuming the role of Chairman in December 2011, the challenges facing the world economies have grown and will, in all likelihood, prevail for a significant portion of 2012. It is therefore pleasing to report that the company continues to meet its targets and expects to deliver on the earnings forecast and strategic objectives set out in the prospectus at the time of the reverse acquisition of Wichford PLC in the summer of 2011".

Special Report Podcast: Roelof Horne - portfolio manager at Investec - Boardroom Talk with Alec Hogg

Special Report Podcast: Roelof Horne - portfolio manager at Investec - Boardroom Talk with Alec Hogg

Why everyone wants to invest in the African continent.

DOWNLOAD THIS INTERVIEW at www.moneyweb.co.za


ALEC HOGG: It’s Wednesday January 18 2012 and in this Boardroom Talk special podcast, Roelof Horne, portfolio manager at Investec and the man that, well, that big group looks at when they’re considering investing in the African continent, joins us now. Roelof, before we go into some of the interesting aspects that were introduced through the interview that I had this week with Johann Rupert of Richemont, how long have you been focusing on the African continent?

ROELOF HORNE: Well, Alec, I was born in Africa and I’ve worked in Africa my whole life. We sometimes make the mistake of excluding South Africa from that but if we’re talking about continent-wide it’s since 2005. It started, I guess, in 1996 when I ventured into the Botswana market and the Namibian market but continent-wide really since 2005.

ALEC HOGG: It was interesting to notice that when the Oppenheimers sold their USD5bn stake in De Beers, when Nicky Oppenheimer was on our programme I asked him what he’d be doing with all that money and he was very clear that it would be invested in this continent, into Africa. He was suggesting Africa north of the Limpopo. Now this is interesting because one would have thought we’ve seen other people make a lot of money in the past and take their money to Europe and other perceived safer havens. What might it be about Africa that is getting someone like Nicky so excited?

ROELOF HORNE: Well, Alec, I think that’s exactly right and that picks up very nicely on what Johann was saying. Basically he said, hang on, these big investors and businesses from India and China are looking at investing in Africa, what’s it that we’re missing? The way we see it really is that the BRICS are important and they’re big and you’ve got to be there but they’re the story of yesterday. That’s where the growth is but that’s also where the competition is tough but if you’re looking for tomorrow’s story it’s Africa and other similar small emerging markets and frontier markets across the world. That’s what exciting people that are saying, well, what’s the next story? Where do we go from here? What are people going to be writing about in all of the magazines and newspapers in ten years’ time? Let’s go there first.

ALEC HOGG: Interesting, Davos this year has got quite a good focus on the Africa story after being pretty quiet last year and I’ll tell you something interesting, Roelof, I think there were two sessions on Africa, they were both fully booked out and you had queues running around – not around the block because they don’t have blocks within the congress center – but that possibly gave an indication. I think there are five or six sessions this year, again an illustration.

ROELOF HORNE: Yes, no, absolutely interesting and I’m not surprised. We’re also starting to see…things have been tough, make no mistake, everywhere in the world, all emerging markets and 2008 happened and now we’ve got the European crisis. So, one sees that in the markets and you see the reaction from investors but I can see the interest starting to come into Africa and that’s from big investors as far afield as the Far East and Hong Kong and those places, as well as the United States. More and more of them are starting to travel to Africa to come and have a look for themselves.

ALEC HOGG: After we played the clip of the discussion with Johann Rupert, David Shapiro and I were discussing it and it seemed to boil down, in David’s opinion anyway, the real place to or the only place to put your money into Africa was mining and maybe a few of the retailers. Is it broader?

ROELOF HORNE: Yes, I think the big thing, the big story maybe that David did not comment on is the consumption spending, which was sort of mentioned with the comment on Shoprite but maybe it’s worthwhile mentioning a few other companies in South Africa that are seeing this opportunity. What is that opportunity? Well, Africa is actually growing quite quickly, the real economic growth in Africa, outside of South Africa, is between 5% and 6% in most of the countries. So, they’re not struggling with the growth headache that we have in South Africa where we’re trying to get to 3%. So, the African middle class is growing, the diaspora are returning, remittances that are around USD40bn now per annum is growing every year. So, African consumer spending is growing quickly. So, you spoke about Shoprite and their success in Africa outside of South Africa, I’ve been in their stores in Luanda and Lagos and I’ll tell you their main advantage is that they have no competition there. They provide the only modern supermarket shopping experience in those two cities with millions and millions of people. They’ve got a great head start but the other South African retailers are going to follow. Woolworths already has 46 stores in eleven countries outside of South Africa. Pick n Pay has announced their intention to follow. MTN earns more in Nigeria than in South Africa. Don’t forget South African Breweries has been there for years and years and some of their fastest growing markets are in Africa. Tigers has bought into Nigeria and Nampak is now in Angola. Stanbic has announced that they’re basically exiting their other emerging market businesses to invest more in Africa. So, it’s widespread.

ALEC HOGG: And it’s not just the big names, I was talking to Wayne Samson from Ellies and he said the reason why they are able to have a trading update to say profits up between 35% and 40% is because of Africa. They’ve got a subsidiary called Megatron, that’s the one that’s spearheading their drive into the continent. So, it’s also in those mid and even smaller caps.

ROELOF HORNE: No, absolutely, absolutely and that also brings to mind that these businesses…Africa is quite tough but don’t think that you can send your second class people there and your second class products or services there, African shoppers are discerning. At the moment a lot of people with money fly to Johannesburg and to London to go and shop. If you’re going to build a sustainable business there, do it properly, send your best people because it’s going to be tough but get them to build a business that’s going to be sustainable and the growth will be fantastic.

ALEC HOGG: That’s all the good news but today we had some very bad news coming out of presumably Africa linked, Impala Platinum is getting a rough ride in Zimbabwe, that’s no secret. Chief executive, David Brown, today resigned. There’s been no linkage between the Zimbabwean problems and Brown’s resignation but on the other hand, if things are going to get even worse in that country it is going to have a knock-on effect for those who are exposed to it. What’s your view?

ROELOF HORNE: Zimbabwe is going through a political transition and it’s a rocky road. Government is under huge pressure to grow their budget, to grow their income and it would seem that they are casting about and, yes, you’re right, I am an investor in Zimplats, which is the Impala subsidiary in Zimbabwe and they do seem to be getting it from all sides there. But I think what also typically happens is that we read the worst possible news in the media and then the eventual outcome is a negotiated outcome, which doesn’t necessarily get trumpeted out. So, yes, it’s tough out there, some countries are better than others and more investor friendly than others. Zimbabwe is not particularly investor friendly at the moment and it’s showing. That country is sitting with a lack of capital, their banks are under-capitalised, they want investment but every now and then they do something that chases away investors rather than attract them.

ALEC HOGG: So, you’ve got to be discerning in where you put your money on the continent?

ROELOF HORNE: Absolutely.

ALEC HOGG: What would be the countries to you if you were sitting in a head office of a multi-national based in Johannesburg and they were asking you questions of which countries to go into, what would be your pick?

ROELOF HORNE: It would really, as you said, you have to be discerning and there are different opportunities in different countries for different industries. If I look at Eastern Africa for example, Kenya is very well covered by, let’s say banks and retailers but Angola imports just about everything that’s consumed in that country. West Africa also imports a lot of things but there they’ve got families and old business that have been around for decades and decades in certain of the industries and it’s not going to be that easy to break into it. Even though everybody looks at Nigeria, it’s got 160 million people, it’s growing fast. But pick your country, do your homework and actually go where there is an opportunity and the opportunities are there because in most of these countries competition is limited to maybe one or two or three competitors, as opposed to the multiples that you would find in a more developed country.

ALEC HOGG: Roelof, if you believe the Africa story and you’re excited about the potential for the continent, what five stocks on the JSE would give you the best exposure? Or let me put it differently, what five stocks would you be able to tell me to invest in to give me an exciting ride, not necessarily the best exposure.

ROELOF HORNE: Yes, yes, you know Alec, I focus much more on finding companies that are listed in the African countries themselves. At the moment specifically I find that the South African companies that do give you exposure to Africa and the best exposure to Africa are relatively expensive to what I can find on the rest of the continent. So, my portfolio that includes some South African stocks with that kind of exposure, my exposure to South African companies is actually pretty low. So, my investments are all over the place elsewhere, from Morocco to Egypt to Nigeria, Kenya, Mauritius and very little in South Africa at the moment.

ALEC HOGG: So, I guess the best way would be to invest in your fund but if you do have access to those stock markets and if you are prepared to open the accounts and, I suppose, go through the processes that you had to, what are the top five holdings in the fund?

ROELOF HORNE: Well, I’ve already mentioned one that I think is hugely undervalued and that happens to be Zimplats. I also think that the Nigerian banks are, and particularly the good ones, are just hugely undervalued. Understandably so because they had a banking crisis in 2009 and we’re still sitting with the after effects of that banking crisis. But for what’s going to happen there in terms of growth and growth in their earnings and the quality of management and those banks’ balance sheets, they are just vastly undervalued. So, there I would think of a bank like Zenith, a company like Access Bank. There are some food companies in Nigeria that I also think are quite exciting. Tigers has bought into one, in UACN, they’ve got a joint venture with them. Then we also have Flour Mills of Nigeria that is expanding very quickly and I’m expecting big things from them. Then, of course, I’ve also got big investments in Egypt, there the political situation is undergoing huge change, as you know, the parliamentary elections has just been done, we’re waiting for the presidential elections to happen in June, so things are in a bit of flux there but that has also made the investments there very cheap, just about everything across the board is cheap there. One of my biggest investments there is a big vehicle company, they import and manufacture all kinds of vehicles, everything from motorcycles and three-wheelers to passenger cars right through to buses and trucks. So that’s GB Auto and that’s one of my big investments there.

ALEC HOGG: Well, we got your five then. Roelof Horne, portfolio manager at Investec Asset Management.

'Too many properties on market'

'Too many properties on market'

There are too many houses for sale on the South African market despite dropping prices - and any improvement in the situation remains unlikely for some time.

The surplus is because of the impact of the troubled global economy on the local economy and the difficulty in getting a bond, estate agents and economists say.

Houses are on the market for more than four months and up to 90 percent of sellers are being forced to drop their asking price by up to 13 percent, according to First National Bank household and property sector strategist John Loos.

He said it was a buyers' market, with prices having declined by about 17 percent in real terms (which refer to average house prices adjusted for consumer price inflation) since February 2008.

"We believe that indications emanating from the latest results of the FNB Estate Agent Survey suggest that the residential market still has some way to go before it reaches that 'holy grail' where oversupplies disappear and the market can finally be said to be realistically priced and, yes, in equilibrium."

Absa Home Loans property analyst Jacques du Toit said the average price of a mid-segment house was almost 14 percent lower in November last year than it was in August 2007. "(This) was the result of average nominal house price growth being below the average headline consumer price inflation rate over the past four-anda-half years."

Nominal house price growth, where the effects of inflation are not taken into account, in the middle segment of the SA housing market was 2.2 percent in 2011. This was down from growth of 7.3 percent in 2010.

Auction Alliance CEO Rael Levitt said improvement in house prices remained unlikely. "This (2011) was a tough year for South African real estate and, after three years of trudging through a severe downturn, the year did not present a path to recovery. As buyer-demand cooled, concerns about global sovereign debt heightened and weak prospects for the local economy worried investors.

"From an auction perspective, we saw a distinct cool-off in demand from the third quarter. In an industry well versed in cheery talk about prospects, no one can claim that the property market has endured anything other than a bruising last year. My outlook for 2012 is disquieting. Quite how bad will depend on a myriad global and local issues, but there is no doubt that 2012 will be filled with challenges."

For the next 18 months, he said, improvement in house prices seemed unlikely, given uncertainties over the strength of the economic recovery.

Absa's latest property price indicator showed that the average price of a mid-segment house was almost 14 percent lower in November than it was in August 2007. Du Toit said the price situation was the result of average nominal house-price growth being below the average headline consumer price inflation rate over the past four-anda-half years. "When average annual inflation of 5 percent was factored in, house prices deflated by 2.7 percent in 2011."

Du Toit said unchanged interest rates in 2011, rising inflation, high levels of debt, damaged credit records and tight labour market conditions all played a role.

"House price growth is forecast to remain relatively low this year, while prices are set to decline further in real terms."

Business Report

Public meetings on Joburg property rates

Public meetings on Joburg property rates

Public meetings on Joburg property rates


Joburg residents who feel that their property rates are unfair now have an opportunity to get the rating policy changed.

The City of Joburg will hold public meetings over the next few weeks to get input from residents.

In the past, residents have expressed little interest and the meetings have been poorly attended.

But the Joburg Advocacy Group is encouraging people to attend and to influence changes to the policy.

According to the group's Lee Cahill, there are some major concerns about the policy as it stands, which residents should be pushing to change.

The main ones are about the valuation of property and the determination of rates.

Rates are based on the council's general valuation roll, and property valuations are now based on both land value and the value of improvements - buildings and improvements on the land.

Valuations are supposed to be market-related and rates charged accordingly.

"However, as market values have either stayed static over the past four years or, in some areas, have fallen, many owners feel that their properties are overvalued and that rates are being determined by budget requirements rather than by market value."

Residents, said Cahill, should be able to query their property valuations using a property questionnaire on the council's website, on the e-services section, but this service is not working.

The advocacy group is pushing for the policy to contain amendments that should state the methodologies the council used to determine market values and give an outline of the recourse available to ratepayers if their property valuations are in question.

Cahill said the group was concerned that rates were being increased to service expensive short-term debt, which the council has had to resort to using as a direct result of its mismanagement of billing and revenue.

For details of the policy and public meetings, visit the council's website at www.joburg.org-DOT-za Comments can be e-mailed to Ratescomments-AT-joburg.org.za, dropped off at 66 Jorissen Street, Braamfontein, or faxed to 011 727 0189. Written comments can be made until February 25.

The Star

Tenders out for sale of landmark Braamfontein property

Tenders out for sale of landmark Braamfontein property

Liberty Properties wants to sell off the Jorissen Place high rise.

 Calls for tenders are going out for the sale of a prominent landmark in Braamfontein adjacent to the Johannesburg CBD. Liberty Properties wants to sell Jorrisen Place – an 18 storey structure spanning Jorissen, Bertha, De Beer and De Korte streets in the upgraded area of Braamfontein.


Head of capital markets at Jones Lang LaSalle, Andrew Bradford, explains how the tender process, which ends on February 29, will work. “People will submit bids in a pre-determined format and then the bid will open privately, so it’s not a public forum and nobody knows what the others have bid. From the bids we receive, we make a recommendation to the seller and they disclose who the successful bidder is.”

Bradford says a building like Jorissen Place usually attracts a fairly sophisticated buyer. In this case the prospective buyer would, after making his or her own calculations, submit a sealed bid.

Liberty Properties own and occupy a number of buildings in the Braamfontein precinct. Bradford says Liberty does not occupy Jorissen Place and the company wants to redirect the proceeds from selling it to other upgrade projects they’re involved with. “This particular property falls beyond their current strategy,” he added.

Liberty could not immediately be reached to confirm this.

Bradford says the opportunity to acquire an entire city block is rare and could attract owner/occupiers, property entrepreneurs and investors. Jones Lang LaSalle, who is managing the project, says they expect to receive around three tenders.

Bradford obviously would not be drawn on what Liberty was hoping to get for Jorissen Place, but he did say: “Liberty obviously have a figure in mind. It’s probably in the region of about one third of its replacement cost. If you recreate that building it will cost you three times more than what Liberty currently wants.”

In a statement LaSalle said the building has 28 000m² of office space, 630m² of retail and 563 parking bays.

Bradford also said in the statement: “If you add the predictable timelines and avoidance of hassle, existing buildings trump new developments by far. We have achieved a number of successes in this space recently with demand for these types of properties for outstripping supply.”

He adds that Jorrisen Place’s location is also attractive in that it provides easy access to the M1 motorway, is within walking distance of public transport and the bustling Park Station as well as to retail.

Tenders out for sale of landmark Braamfontein property

Tenders out for sale of landmark Braamfontein property

Liberty Properties wants to sell off the Jorissen Place high rise.

Calls for tenders are going out for the sale of a prominent landmark in Braamfontein adjacent to the Johannesburg CBD. Liberty Properties wants to sell Jorrisen Place – an 18 storey structure spanning Jorissen, Bertha, De Beer and De Korte streets in the upgraded area of Braamfontein.

Head of capital markets at Jones Lang LaSalle, Andrew Bradford, explains how the tender process, which ends on February 29, will work. “People will submit bids in a pre-determined format and then the bid will open privately, so it’s not a public forum and nobody knows what the others have bid. From the bids we receive, we make a recommendation to the seller and they disclose who the successful bidder is.”

Bradford says a building like Jorissen Place usually attracts a fairly sophisticated buyer. In this case the prospective buyer would, after making his or her own calculations, submit a sealed bid.

Liberty Properties own and occupy a number of buildings in the Braamfontein precinct. Bradford says Liberty does not occupy Jorissen Place and the company wants to redirect the proceeds from selling it to other upgrade projects they’re involved with. “This particular property falls beyond their current strategy,” he added.

Liberty could not immediately be reached to confirm this.

Bradford says the opportunity to acquire an entire city block is rare and could attract owner/occupiers, property entrepreneurs and investors. Jones Lang LaSalle, who is managing the project, says they expect to receive around three tenders.

Bradford obviously would not be drawn on what Liberty was hoping to get for Jorissen Place, but he did say: “Liberty obviously have a figure in mind. It’s probably in the region of about one third of its replacement cost. If you recreate that building it will cost you three times more than what Liberty currently wants.”

In a statement LaSalle said the building has 28 000m² of office space, 630m² of retail and 563 parking bays.

Bradford also said in the statement: “If you add the predictable timelines and avoidance of hassle, existing buildings trump new developments by far. We have achieved a number of successes in this space recently with demand for these types of properties for outstripping supply.”

He adds that Jorrisen Place’s location is also attractive in that it provides easy access to the M1 motorway, is within walking distance of public transport and the bustling Park Station as well as to retail

Developers ask for extension of urban development tax scheme

Developers ask for extension of urban development tax scheme

Developers ask for extension of urban development tax scheme


The government has been urged to extend the urban development zone (UDZ) tax incentive by another five years to March 2019.

An extension would help boost prospects for urban regeneration, says Colin Young, director of Nine Cubed Group, which proposed and brokered the R1.6 billion landmark co- development office project planned by First Rand Group and Old Mutual for the Portside site in Cape Town's central business district.

Young says the incentive was introduced to promote office and residential development projects in carefully selected UDZ areas of major cities.

"It aims to encourage investors and property developers to fast-track their development schemes," he says. "There are real benefits for corporates that want to invest in inner cities, notably to own and occupy their own buildings. Currently, though, any businesses considering investments, for instance, to consolidate space, need to move quickly if they are to benefit. Construction needs to be completed before the UDZ tax incentive expires at the end of March 2014."

Young says the reality, though, is that many projects have been delayed in the wake of the global economic meltdown and the negative impact this has had on bank lending requirements.

"Growth is also expected to be muted for some time and this is likely to curb developments which in any event involve time-consuming processes. Extending the incentive by another five years to March 2019, by which time the economy should have picked up, could allow more projects to be kickstarted during this extended period and for benefits to flow to cities.

"Another reality is that regeneration of urban zones already endowed with sound service infrastructure will allow city funds to be better deployed in improving facilities in underserviced areas."

Young says the UDZ tax allowance underpinned the financial benefits highlighted in the Nine Cubed Capital Portside development proposal.

Portside will be Cape Town's tallest building. It will be the provincial headquarters for the three divisions of the First Rand Group - First National Bank ( FNB), Rand Merchant Bank and Wesbank. Co-owner Old Mutual will offer an additional 25 000m² in the lower office portion of the tower to house corporate office tenants. The development is seen as a major boost for economic activity in the city.

Weekend Argus (Saturday Edition)

Standard Bank`s median house price eases 0.4% y/y

Standard Bank`s median house price eases 0.4% y/y

Manufacturing production growth surprises on the upside.

House price growth has by and large reached a plateau in recent months according to Sibusiso Gumbi, research analyst at Standard Bank. Standard Bank's (smoothed) median house price (using the assessed values of those houses for which mortgage finance was approved by Standard Bank) contracted by 0.4% year on year (y/y) in December from a contraction rate of 1.0% y/y in November.

Manufacturing production growth surprised on the upside, buoyed by a weaker rand, rebounding to 2.6% y/y in November from growth of 1.2% y/y in October. A sustained improvement, however, remained under threat, given the ongoing churning of global economic waters (particularly in the eurozone, SA's key trading partner).

Total credit extension to households crept up to 5.4% y/y in November from 5.3% y/y in October. Conversely, growth in mortgage advances had continued to ease, registering 1.9% y/y growth in November from growth of 2.1% y/y in October.

Households' sizeable existing debt burden might serve to weigh down on further credit uptake.

Gumbi said that data released by the National Credit Regulator (NCR) encouragingly pointed to a slight improvement in overall consumer creditworthiness in Q3:11 (the latest period available). Of the 19.1 million credit-active consumers tracked by the NCR, 53.8% were classified as being in good standing in Q3:11, from 53.3% in the previous quarter.

High-frequency data corroborated the trend, with the number of civil summons issued and judgements recorded for debt for private individuals having continued their descent in October (recording y/y declines of 16.1% and 22.4% respectively). The number of insolvencies too suggested improving consumer creditworthiness, having registered a 17.0% y/y fall in October.

Analysts warn of a bumpy property ride

Analysts warn of a bumpy property ride

Say the top five performers of 2011 are too expensive.

Analysts have warned of a bumpy ride ahead in the listed property sector but say the asset class remains viable over the long term. The top performers for 2011 were Fortress B, Capco, Sycom, Investec Property Fund and SA Corporate. The bottom five were Capshop, Emira, Dipula, Redefine International and Hospitality B.

Paul Duncan, portfolio manager at Catalyst Fund Managers, says while Fortress B is a company run by an excellent management team, it is unlikely to sustain its outstanding 106% year to date yield. Fortress listed in October 2009 on the main board of the Johannesburg Stock Exchange as a property loan structured stock company. Duncan says the company does carry more risk due to its high levels of gearing. A company with high gearing or high leverage is more vulnerable to downturns in the business cycle as it has to continue servicing its debt regardless of how bad property fundamentals are.

Ian Anderson, the chief investment officer at Grindrod Asset Management, says: “The highly geared nature of the Fortress B units ensured that distribution grew by more than 38% in the six months to end of June 2011 and similar distribution growth is expected over the next two years.” Anderson warns, however, that forecast risk is high and investing in Fortress B is not for the faint hearted. Anderson explains that in a dual unit structure, such as Fortress, the A units always have a preferential right to earnings while B units will receive the balance of the distributions. Simply put, once the income due to the A unit holder has been paid, the B unit holder will be paid the balance.

On the other hand, Duncan says Fortress A is a fairly low risk option and is likely to provide a secure income yield plus 5% per annum income growth. Anderson says on a forward yield of 8.5% Fortress A is no longer offering significant value given the constraints on growth once the economy picks up.

Commenting on Sycom, Duncan said: “I think Sycom is fantastic quality, but the company has traded beyond its fair value and it’s unlikely to generate appetite at these levels. Anderson says Sycom looks expensive and is likely to underperform in the sector in 2012. Sycom consensus view Duncan says Capco, which is UK-based and dual listed on the JSE is expensive and illiquid and will probably not enjoy much institutional support at current trading levels.

Duncan attributed Investec Property Fund’s performance, which was fourth on the ladder to the company’s brand. “Some investors like the brand and probably support it on the back of Investec being involved.”

Anderson says while Emira performed poorly in 2011 and was forecasting a decline in distribution this year, the income yield at just under 10% does offer value despite the tough operating environment and deteriorating portfolio measurements.

He says Hyprop’s long-term track record is amongst the best in the sector but had a tough year in 2011 with another difficult one looming in 2012. He adds, though, that Hyprop remains a core holding in any long term portfolio given the quality of its retail portfolio.

The dismal performance of Hospitality B is due largely to its reliance on income from the operating profits of the hotels in its portfolio. Anderson says: “Unfortunately the hospitality industry is suffering from over-capacity and weak economic growth. Forecast risk is extremely high and the security is not recommended for income dependent investors.” Duncan adds: “When the hotel operating cycle improves, the Bs (B units) will have their day in the sun.”

On the funds in general, Duncan says some of the smaller caps like Vunani are attractive but illiquidity could be problematic. Other funds to keep an eye on are Emira and Fountainhead. He says property has been the best performing asset class over the past five years and while the year ahead is likely to be challenging, over the long term there is still a reasonable expectation of a total return of between 12 and 13%.

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Residential property to mirror SA economy: Jawitz

Residential property to mirror SA economy: Jawitz

Uncertainty remains as to the rate at which the economy may grow or contract over the next 18 months.

The residential market in 2012 will, for the most part, mirror the performance of the South African economy, which is holding its own despite global trends. Uncertainty remains as to the rate at which the economy may grow or contract over the next 18 months according to Herschel Jawitz, CE of Jawitz Properties.

"The residential market is no different and given the current economy, it would be difficult to expect anything else. Price growth, even if in nominal terms only, is managing to hold its own given current economic volatility."

Jawitz said that current price growth was appropriate to the economy especially when issues such as disposable income, affordability and bank lending were taken into account. If property prices were to grow beyond current inflation, it may well reduce demand below the current levels based on affordability. Real price growth taking into account inflation was always first prize, but in the current economy it is likely to impact on affordability and inhibit demand.

"Banks continue to report soft demand in the market, but these are general statements and do not necessarily reflect the market as a whole," he said. "Coastal leisure markets are under pressure and will remain so for some time as supply significantly exceeds demand.

"It is not the same however in the metro areas, particularly in the price bracket up to around R3.5 million where demand, while not strong, is better than the banks' research suggests. There is activity."

"Interestingly, lending on cars, personal loans and credit cards is increasing at a much faster rate than mortgage financing. Ironically, it would appear to be easier to get an unsecured loan than a mortgage loan secured by bricks and mortar.

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How successful is selling your property on auction?

How successful is selling your property on auction?

David Pincus looks at the strike rate and average sale price.

2011 may not have been the sparkling year some big property auctioneers hoped for - but don’t cry for them - the drop wasn’t major. That didn’t apply to all. Some even claimed their 2011 figures eclipsed their 2010 figures.

The Claremont Auction Group, a major auctioneer in the Western Cape, auctioned 850 properties in the Western Cape in 2010, and 1 100 in the same region in 2011.

Its success rates in both years was 60%, according to Jonathan Smiedt, the group’s CEO.

Rael Levitt, CEO of Auction Alliance, arguably the biggest auctioneers in the country, which auctioned 4 768 properties nationwide in 2011, says, “our success rate dropped from 67% in 2010 to 63% in 2011”.

Within a percentage or two both sets of figures are probably close to many major auctioneers’ success rates. “But,” says Smiedt, without divulging where he got the figures from, “23% is the industry’s success average.”

Some auctioneers claim better sales success percentages, because like Park Village Auctioneers (PVA), which claims a 90% success rate, they will only put properties under the hammer they can almost guarantee they will be able to sell at prices their sellers will accept.

PVA’s director Roy Lazarus, says: “we reject 68% of the properties we’re offered because the sellers’ prices are unrealistic.”

Auction Alliance and ClareMart’s figures are probably a reasonable reflection of the auctioneering industry’s performance in the property sector.

Regretfully, it isn’t possible to paint an accurate picture of the entire auctioneering industry’s performance, because unlike the automobile industry’s representative body, the National Association of Automobile Manufacturers of South Africa (Naamsa), which collects and correlates sales statistics and issues accurate monthly reports, the auctioneers’ representative body, the SA Institute of Auctioneers (Saia), doesn’t.

It’s an open secret that demand for homes in the Western Cape is growing. Smiedt says there was an even split between commercial and residential properties auctioneers sold in 2010. “However, in 2011 there was a shift in the market, towards the residential property market, which accounted for 63% of the (Claremart) group’s sales.”

He claims the average selling price his group achieved in the residential market last year ranged between R2m and R4,1m, and attributes the fall-off in activity in the commercial and industrial market to “less buoyancy in industry and commerce, due to the global recession, and commercial property owners being unwilling to accept market-related prices achieved on the auction floor”.

Auction Alliance differed. It found there was strong demand “for high value, well let and well located commercial and industrial properties priced between R20m and R30m. “The middle residential market was quite tough; the entry level market, below R1.5m was the easiest. Upmarket houses above R5m were the most difficult to sell.”

These prices are significantly more than the national average nominal prices quoted for 2011 in the Absa Property Index. It states that small homes of between 80m2 and 141m2 went, on average, for R884 400, medium sized homes between 141m2 and 220m2 for R985 400, and large homes, between 221m2 and 400m2 for R1 548 200.

Absa’s average prices, which include prices of homes sold by auctioneers and estate agents, are virtually give-aways when compared with some of the prices Auction Alliance, for example, achieved last year. Like R45m for a house in Sandhurst, Johannesburg, where, says Levitt, “the average value for a house is R45m.

“We sold a flat in Mouille Point, Cape Town, for R46m, the average value for apartments along the popular Atlantic seaboard then was R5.6m.

Quoting prices closer to Absa’s average prices, he notes that, “on the East Rand we sold more than 320 houses for prices exceeding R1.05m.

“Fully let commercial properties with yields of between 8% and 9%, were sold at average prices of R9.5m. The highest prices were achieved in the retail sector, where the Lonehill and BelAir Malls in Gauteng were sold in 2011 for R720m.”

Levitt and Smiedt agree on one point, that is, as Smiedt puts it: “auctions are increasingly becoming the first choice of fixed asset disposal and acquisition in the private sector.” But they cannot prove that claim without accurate statistics.

Summing up 2011, Levitt says: “Our sales exceeded R6bn. The greatest challenge for the auction industry in 2010 and 2011 was attracting buyers who rebelled against having been over-supplied with non-income producing and distressed properties.

“Economic headwinds, and low interest rates, did little to boost sentiment. However, despite feeble demand, Auction Alliance sold more than R350m worth of failed developments in 2011.

”Office block sales were strong in the first two quarters, compared to 2010, but there was a stabilisation in enquiries by year-end.

“I foresaw the commercial market as being one of Trophy and Trauma. Our outlook remains unchanged. A spate of new JSE property listings will accelerate demand for cash-producing property.”

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