The Futuregrowth Community Property Fund was launched in 1996 when no-one would touch a shopping centre in so called ‘no-go’ rural areas. Today, almost 20 years later, the fund is R2,2bn large and owns over 30 facilities around the country. It has also been able to deliver stellar returns under the careful management of Smital Rambhai. The fund has managed to outperform the listed property sector and the JSE over the last gruelling year by a long margin. Long-term performance has also been very rewarding. As the townships have started to attract more and more financing for shopping facilities, Futuregrowth enjoys and maintains first mover advantage in that they already understand and work in the market and have a large portfolio just ripe for expansion. Futuregrowth really does deliver the good news stories that every South African needs right now. Let’s spread the word. – Candice Paine
This special podcast is brought to you by Futuregrowth Asset Management. Candice Paine is with the Smital Rambhai from Futuregrowth’s Community Property Fund. Smital we spoke not so long ago, describing the characteristics of the Fund but just to update you, the Fund is now R 2.1 billion, almost 20 years on, and specifically focuses on providing retail facilities to previously disadvantaged communities around South Africa. The fund has done particularly well over the last very difficult year. Smital how did you manage get those returns and how are things going in the actual communities and the facilities.
Thank you, Candice. Just in terms of the performance of the Fund ending January 2016 for the 12 months, the Fund returned 17.9 percent whilst the listed property sector was down 2.4 percent. How did we achieve that return? It was quite a lot of hard work from the team on the ground with very aggressive letting of spaces.
I’m sure because that is an amazing return.
The credit goes to the people on the ground, the teams that are doing the leasing, the repairs and maintenance. The whole team as a unit, adds value to the property. As I always say, your property’s only worth what your management team does with it. We saw vacancies going down from 8.1 percent from the prior year, down to 5.4 percent. In fact, we almost hit 10 percent in vacancies at one stage because of the Ellerines’ blowout.
Okay.
We managed to fill up those large, big box spaces with the likes of Mr Price and Autozone, who require nice big spaces.
Those are good anchor tenants so they’re obviously happy with the management of the facilities.
Yes. We have about 86 percent national tenants across the portfolio so they are quite reputable companies, which are quite well embedded within South Africa.
Are they signing long leases?
Yes, all of these leases are between three and five years. If you look at your big anchors like Shoprite and the Pick ‘n Pays, some of them are ten years even because they see the growth in these areas and the trading density is in some of the anchor tenants, I look at the numbers, they’re priced in some areas, twice or thrice as much as in your metropolitan areas so it shows that the communities in which the shopping centres are, those communities are still growing at quite a pace.
Read also: Futuregrowth: Building communities through shopping mall development
You’re definitely fulfilling a need if you’re able to grow your funded 17.9 percent over the last year. What has been your annualised return over the last while?
It’s just been over 13% since inception over the last 20 years. I think these types of assets need quite active management. It’s not like your typical shopping centre in a metropolitan area where there’s no social dynamics behind it. The shopping centres in townships and rural areas, you always have needs from the local community and you need support from the local community. We try to establish programmes that will benefit the community through the shopping centre. Maybe I’ll touch on that a bit later but I want to go back a bit to the performance.
It was a large reduction in the vacancies and we still believe that the vacancies will continually come down from 5.4 percent. We’ve already, at the end of last year with pre-lets our space was… tenants don’t always take occupation on the date they sign the lease, it was already at 4.7 percent and our target for the end of the year is about 3.5 percent vacancy and we saw a large reduction in expenses. If I look at, we entered into large national supply contracts. Waste management services for example, some areas we were paying R 60 000 to R 100 000. Now we’re paying on average R 30 000 per shopping centre.
It really is efficient and tight management that is coming through in the performance of your fund.
Correct and we also managed to tap into additional sources of revenue through advertising and promotions. Your corporate entities that have retail products that want to advertise in the shopping centres on banners and even outdoor banners, your general commodities, like your washing powders and so forth. I don’t want to mention any specific names but those kinds of initiatives where we’ve gone and tried to source additional income. We previously used to generate only about R 50 000 per annum. Last year we generated R2.4m.
From internal advertising within the facilities?
The shopping centres, yes and we continue trying to increase that. We believe that these shopping centres on average, the 18 shopping centres should be doing that R2m plus every year.
Do you have one management company managing all of the facilities around the country?
Yes, there’s a company called Capital Land Property Management. They used to run the Synergy Income Fund that was listed on the JSE and they exclusively provide their property and asset management function to our fund at the moment.
Therefore, there are economies of scale. If they see something working in one shopping centre they’ll immediately roll it out.
Roll it out, correct and then we also have a gradual reduction in arrears and bad debts. We actually, if I look at the reason behind it is that there’s a better collections process. Once the billings go out we follow up with the tenants within a week if the payment’s not made and there’s constant engagement with the tenant and if a tenant’s struggling, we try and get them onto payment plans, so we’ve managed to change that as well. Then also if I look at the leases that were signed with tenants, the average escalations on the lease is around 7.7 percent which is above inflation and also the new leases that we’re signing, there’s positive reversions on those rentals which is around 3.6 percent.
There is still good growth that we see. We’ve also improved our property compliance. What happens is that over time your buildings age and to keep up to date with the latest in your occupation and health and safety standards your insurers come and out and they assess your properties to see how compliant you are. I believe that our property portfolio was compliant to a certain extent but we didn’t exceed expectations from the insurers. We embarked on a project to do repairs and maintenance and upgrade the compliance. What that did is it dropped our insurance premium from R8m to R5m a year. We’ve saved R3m in insurance costs and our excess went down because I think there was a perception that these shopping centres in the rural areas were dangerous and there was much higher risk and our excess dropped from R5m to R 250 000 just by increasing the compliance of the properties.
Read also: Futuregrowth: providing retail facilities to previously disadvantaged communities
A lot of the growth has come from efficiencies, cost cutting, and better management. Where do you see the growth coming from going forward? It’s kind of two-pronged. Is there more capacity within the South African context to build more of these facilities and within that, now that you have such a streamlined management process, how will you be able to keep up that sort of growth?
First of all we are seeing opportunities come across our desk. What we’re finding that the larger list of property companies keep bulking up assets and they’re becoming bigger. They want to pay attention to the larger assets. If I look at our property portfolio, our biggest shopping centre’s 40 000 squares. On average, the rest range between 10 000 and 25 000 square metres now and if you’re going to big play on the JSE and you look at a 10 000 square meter property you’re not going to put in a lot of effort because on your overall portfolio it’s not going to add much to the overall returns.
For a company like us that, we’re niche managers, we’re on the ground. We can extract better value out of those properties than the larger entities. We’re looking to buy off those assets from a larger list of companies and we’re also finding that some properties are just generally mismanaged that are even in close proximity to our shopping centre. We try and approach who the owner is to try take over those properties in order to implement the same strategy and process around those properties.
It is a case of small wins all over that are adding up to great performance?
Yes and like I said it’s all very nicely managed. We have a portfolio manager that looks after every region. We have a portfolio manager through capital land in KZN, in Gauteng, in the Western Cape and within his team each centre manager then reports in to him and he looks after the shopping centre. It’s micromanaged and if the portfolios grow in certain provinces we’ll add another portfolio manager but we’ll never overburden the portfolio manager with too many properties.
The fund is called the Community Property Fund. Let’s talk a little bit around the community involvement and how that has also added to the efficient running of the centres.
There’s always a lot of service delivery protests in some of the areas we operate and there’s many reasons. Dysfunctional municipalities, promises that were made from people and I think communities are getting fed up because even the private sector’s not helping out in uplifting the communities because generally you have CSI programmes where it’s a donation, it’s not sustainable.
The money’s not well spent.
It’s not well spent and you often find that the money disappears through some form. What we try and do is we don’t try and give money away to CSI projects. We try and do the CSI projects ourselves and where it’s sustainable. For example, each shopping centre currently supports two to three schools in its direct close proximity and we provide them with stationary and portable lap desks because we find that the schools, many students don’t have desks to sit on and we’re currently investing in chairs because we’re finding there’s a shortage of chairs as well. It’s trying to address what is required in those schools. I don’t know if I mentioned last time we have academic prize sponsorships as well.
Yes you did.
We’re getting great feedback. The last letter I received was from a student at one of the schools in the Eastern Cape and she thanked the shopping centre for paying for her full school fees because she finished top of her class.
That’s amazing.
Her matric year was fully paid and for us R500.00 is not a lot of money but to someone living in those communities where they’re disadvantaged R500.00 can go a long way.
Yes, absolutely.
We on top of that give them a voucher to spend in the shopping centre that could be used for school uniforms and supplies.
Through those community projects you are building ownership and loyalty and pride in the centres and within the communities. Smital, it’s been a pleasure talking to you again. Congratulations on those fantastic returns and we’ll continue watching as Futuregrowth does uplifting and life enhancing things in our communities. Thank you very much.
Thanks Candice.
