Rebosis CEO Sisa Ngebulana on future of SA property (watch video)

Rebosis Property Fund, listed on the Johannesburg Stock Exchange (JSE:REB), has pleased investors with 8% distribution growth. It has released its full-year results. In this interview with CNBC Power Lunch host Alec Hogg, Rebosis CEO Sisa Ngebulana shares some of his team’s thinking on where the South African property sector is heading and how Rebosis plans ahead. Rebosis, which has a market capitalisation of not far off R5bn, invests in large CBD buildings as well as smaller shopping centres that are dominant in areas. It has got plans to put more money into retail property, seeing opportunities there even though consumers are under strain. The Rebosis CEO also touches on the controversy around shopping centre exclusivity clauses, saying it would be good for landlords if an end could be brought to them. Big retailers like Pick n Pay, Shoprite and Spar have great power in determining tenant mix and have blocked competitors from opening their doors in shopping malls in prime locations. South African retailers have the largest margins in the world. Complaints have been filed with the Competition Commission against these listed retailers about exclusivity clauses. – JC

ALEC HOGG: Welcome back to Power Lunch. Rebosis Property Fund released its full-year results this morning. It’s reported at 44 percent increase in ‘assets under management’ due to an increase in the value of the portfolio and the [inaudible: 00:18] portfolio that was added to it. That’s to a number now of seven-point-six billion. The important one though, for the shareholders, is the eight percent growth in distribution. Joining us, in the studio is Sisa Ngebulana who’s the Chief Executive of Rebosis. Sisa, it’s an interesting place that you’re at right now because clearly, the portfolio is doing well, you’re in the expansion mode, you’ve just bought a management company, but how long do you guys look? How many years into the future, when you’re sitting in your strategy team do you take a view on?

SISA NGEBULANA: Alec thanks. I think we’re very excited about our results and I think, back to your question. I think, first of all, you take the current year, when your budget comes in and you do your focusing, and that’s quite important that you come within your focus range, or be on the upside, like we’ve done now.

ALEC HOGG: But how long and I’ll tell you why, because I walk to work here every day and I see ENS are now building yet another huge building opposite the Gautrain. It’s massive. There are many of these buildings going up around there and then you read Larry Page, from Google, who says ‘hang on, guys. We have driverless cars, who’ve done hundreds and thousands of kilometres on the roads in California already, so it’s coming to the rest of the world, and there are so many technology changes’. It’s a difficult place to be when you’re buying property because you presumably take a 20 to 30-year view.

SISA NGEBULANA: Yes, I think you have to take; generally, we take beyond a ten-year-view, on the property. It really depends, first of all, what sector are you investing in, so an office it will depend on the tenant and how much years are left on the leasing and at the end of the lease, we’ve got to determine, let’s say you’ve got an eight year lease remaining, where the market would be in eight years. What’s the likely mix in that market? For instance, if it’s an office environment, where it’s a new node, etcetera, you’ve got to determine whether everybody is coming to this node. The node would be better off if people work, they live there, and they work there, because that’s the trend. If it is saturated markets, like Sandton nodes, you have issues coming up in eight years’ time because already you have an oversupply issue. Each market in each sector is different.

ALEC HOGG: You’ve got to box clever.

SISA NGEBULANA: Yes, you’ve got to box very clever and I think that is why we largely invested, for instance, in very large CBD buildings, where tenants are highly unlikely to move. They’re big users and, once they’ve invested a lot of capital in the infrastructure and everything in those buildings, they are highly unlikely to move. We’ve got empirical evidence of that. That’s the office side. On the retail side, we invest in dominant centres, regional shopping centres. We’ve seen them up, through cycles, bad cycles in retail where consumers are under strain. They tend to be very resonant because the consumer, instead of going to the usual, convenience centre, the neighbourhood centre, and not find certain things and have to travel to a bigger centre to find certain things. They just go straight to a bigger centre and, hence that’s why they’ve been far more resilient, tough cycles.

ALEC HOGG: These Exclusive Leases that are starting to hit the headlines now, particularly with Walmart having acquired Massmart, and not being able to break into the market. Have you got any exposure to them?

SISA NGEBULANA: Look, in a roundabout way, as a landlord, it’s a good thing for the landlords. Whoever is exposed to it, you let the tenants fight, and the Competitions Authority will rule. If the Com-Com says, it must be scratched out, then it will be scratched out and then you can have new tenants. You know, the centre, you can expand at the back of that, so in a roundabout way, it is actually good for us, so if you are exposed to that, it is actually good for you. We don’t have that now, in our portfolio.

ALEC HOGG: So, you were on the back foot in the past because say a Shoprite would come to you and say, “We’re only coming in if you give us an Exclusive Lease.”

SISA NGEBULANA: Yes.

ALEC HOGG: But if the Competition Authority scraps it, Shoprite can’t use that weapon against you, so it’s not a bad thing for you.

SISA NGEBULANA: Absolutely, and that’s good. It’s a good thing.

ALEC HOGG: What about the changes that you’re seeing in the Eastern Cape, in particular? There was a wonderful piece that Matthew Lester wrote this morning, about the World Bank Report.   Saying that were it not for the Social Grants, South Africa would be in huge trouble now because the poor are in a way being kept up through that; we know that the Eastern Cape is a very poor Province. Is it something that you see in your shopping centre, particularly the Hemmingway’s down there?

SISA NGEBULANA: If you break up the Eastern Cape, as a Province, you have the Eastern part of the Eastern Cape, where there’s virtually no economy. That’s the old Transkei territory, which spans for about 400kms, from KZN, all the way to the border, what we call the Kai Border, which is about 100kms from East London. There is virtually, it is villages. There is virtually no employment and that’s bulk of population. Then you have the real mainstays of the economy, being East London and Port Elizabeth and that’s where the economy is and that’s where there’s business. You’ll find a lot of motor manufacturing in PE, particularly Mercedes Benz. I think the motor industry makes up about 23 percent of that economy. Then followed up by many other industries, within that PE, we’ve got pharmaceuticals; Aspen is there, you’ve got Johnson and Johnson. You’ve got a couple of other industries.

ALEC HOGG: So the West or the East is actually not too bad.

SISA NGEBULANA: They are very different economies.

ALEC HOGG: In your shopping centres?

SISA NGEBULANA: In our shopping centres, we’ve seen, it’s a bad cycle, so consumers are under strain, household debt is up against disposable income but we’ve seen, for instance, Hemmingway’s has grown in the reporting year 18.8 percent on turnover. Retail sales, if you compare the retail sales it is chalk and cheese, so it’s very pleasing. Again, it talks to the fact that we actually dominate. There is nothing; there’s no peer comparison, in a radius of 200kms, not just East London. People come from far to come and shop there and we’ve got massive family entertainment, which also talks to the dominance of the centre and that’s the kind of centres that we’re exposed to. Having said that, and I think going back to the Government Grant System, you take towns like Umtata, we’ve got a ‘First Right of Refusal’ to Billions Group pipeline for instance, on the retail side.

Billions is busy with a Centre, a big centre in Umtata. Umtata has got a high retail sale, historically and they’ve withstood the bad cycles and it goes back to the point, because of the Government Grant, because it’s got no cycles.

ALEC HOGG: Sisa Ngebulana, from Rebosis giving us some insights there into, perhaps the future of property as well as what happens or what are the advantages of actually having those Social Grants. Remember that you can email us on [email protected]. After the break, we’ll unpack Harmony’s third-quarter numbers, with the company’s Chief Executive, Graham Briggs. Stay with us.