On the face of it, Futuregrowth Asset Management’s Community Property Composite specialises in acquiring and developing new and existing shopping centres. But it’s more than that. It specifically targets under-serviced communities. It targets rural and township areas around the country – areas that other investors would possibly steer away from, anticipating a measure of risk in putting their money in areas where poverty rather than affluence prevails. But the Futuregrowth strategy works. Not only is there a significant return for investors, but the development of the shopping centres in the underprivileged areas has a significant social and economic impact. More than 10 million people benefit from these projects, not only because they no longer have to travel large distances to do their shopping, but also because the shopping centres act as a catalyst for other developments such as improved electricity, water and sewerage services as well as transport infrastructure in the form of taxi and bus ranks. The Futuregrowth Community Property Composite is unique in that it provides investors with a property development portfolio that has a real social-economic impact. David O’Sullivan spoke to Futuregrowth’s Smital Rambhai about the Composite.
Let’s start by looking at the Futuregrowth Community Property Fund, a portfolio specialising in the acquisition of new and existing shopping centres. Smital, take me back to the origins of putting this portfolio together?
All right, so the fund started back in 1996. We just came out into a new South Africa,and none of the banks wanted to lend money to property developers or companies, to build their shopping centres in the townships and rural areas. I think it was mainly to do to the fact that people didn’t understand the risks in these areas. Futuregrowth saw it as an opportunity for infrastructure development, job creation – during the construction phase and after the construction phase. Futuregrowth also realised that there were much needed key services that needed to get out to these communities.
How was it that you were able to see this as being less of a risk than other organisations in the financial services sector?
So, when we look at these areas, they’re quite remote, they’re rural areas and we invested in some of those township areas. If you look at the Social Grant system. Many of the community members used to travel 30 – 40kms to go and get their grant pay-out and we realised that would eat into their disposable income, at least 20 – 30%, and they would have less, in terms of purchasing for essential food and clothing. We realised that by bringing the centres closer we’d benefit the community. For us the risk, it’s not a risk because 88% of our tenants are national tenants, providing basic goods and services, so the likes of Shoprite and all the banks are there, and your pension pay-out points.
Over the years that the fund has been operating, how many shopping centres have you purchased and developed?
So, over the years we’ve attached and developed just over 30 shopping centres and currently we own 18 in our portfolio.
How do you identify those shopping centres? How do you identify the areas that you would like shopping centres to be developed?
Our first criteria is if there’s a lack of services to very remote communities and our second is we look at the demand for retail, together with the large retailers like Shoprite, Pick ‘n Pay, and Pep and Ackermans. We then do a feasibility assessment around the demographics of the area. Whether there’s enough income to support the building of the shopping centre.
Do you actually go onto the ground, speak to people on the ground? Have you got a model that you now follow?
Yes, so our fund is very hands-on. I’m going to just talk around the day-to-day management. All the shopping centres are based in, like I said, remote areas and often you find that if you don’t engage with the local communities there’s always issues around employment, so we engage. We have quarterly meetings with the local community leaders, and sometimes the chiefs in certain areas, as well as tax associations, to understand what the communities needs are in terms of either employment or social upliftment within the community.
Are you in all the Provinces?
So, we’ve got shopping centres in 7 of the 9 Provinces. The reason why we’re not in the Northern Cape – there’s already enough shopping centres out there and we find that if we had to develop something there it would cannibalise the market. Again, in the North-West, we’ve been lucky not to be there, given that the mining sector has gone through a bit of a struggle but we are still looking for opportunities out there.
I suppose tenants are now aware of the sustainability of the project. Is it easier over time now, to attract the tenants you want for those shopping centres?
Yes, so it’s an interesting thing. We look at our retail trading densities and often you find that a lot of the retailers that operate out in these remote, rural areas, where there’s a lack of competition. They tend to do better than in the urban areas. Some of our retailers are doing double the sales volumes in certain areas.
So, do you have, as tenants, some of the major retailers?
Yes, so 88% of tenants in our shopping centres are all national tenants, so the likes of Shoprite, Pick ‘n Pay, Boxer, Pep, Ackermans, Capitec, African Bank – all the major banks, they’re all out there.
To what extent do you have the local SMEs, who come and rent space as well?
All right, so the balance, I mean I’ve mentioned that about 88% of our tenants are national tenants. The balance, which is the 12%, are normally your local businesses that come from that community. When those national retailers come into those centres they actually uplift and help drive revenue for those smaller retailers.
How’s the composite now performing, let’s take it as at the end of the year?
So, the fund had stagnated back in 2013, and we realised that we had to focus on our tenants, in terms of serviceability and making sure that our turnaround times in terms of repairs and maintenance was within 48 hours. We focused strongly on our tenant mix and making sure that the areas in which we operate, we get the right tenant mix in place. After 18 months of hard work, from 2013, we started reaping the benefits. In 2015 the fund returned a total return of 17.5% and in 2016, 12-months ending December, we returned 24.3% for our investors.
What are your projections, going forward?
So, going forward we feel that there’s still strong growth in the portfolio. We’ve looked at the recent statistics from SAPOA (South African Property Owners Association), and it shows that the rent to sales ratios or the cost to occupancy for tenants in our types of shopping centres is still relatively low, which means that it gives us the ability the increase rentals quite a bit. We’re seeing that not only from a statistical point of view from the market but we’re seeing it directly on our properties as well.
Are you looking to develop more shopping centres in 2017?
So there’s three routes we’re taking. The first step is, we’ve identified some shopping centres that, again, aren’t properly run. They’ve got a high rate of vacancies because we believe that the current owners don’t understand the market and the tenant mix. Then the second avenue is we’ve owned some of these shopping centres for more than 10-years and we find that some of these communities have doubled in size and population, so there’s an opportunity to, in some instances, double the size of the shopping centres. We’ve identified two of our shopping centres for that. Then the third one is to partner with property developers, where we’ve identified growth in communities, where nothing currently exists.
Let’s talk a bit about the social impact of this project and the fund. You’ve spoken about the upliftment of people’s lives. You’re bringing the shopping to them. The retail opportunities to them, but I would imagine that’s got a wider impact. There’s a domino effect and it stimulates growth in other sectors. Tell me a little bit more about that.
All right, so for us the communities integral to the success of the shopping centre, so we did a survey recently that 80% of the employment, within the shopping centre comes directly from the local community in which that shopping centre operates. Obviously, that has economic benefits in that people are earning a salary and contributing back into the community. Then what we’re seeing is that there’s opportunities for us to use the local labour force to do, for example, repairs and maintenance on the sites because we find that there was a complaint from a lot of centres, where the local community was in uproar that you’re bringing all of these contractors from outside their region, when they can do the job as well. So, we’ve now started using more and more local labour to drive developments.
You’re also a catalyst for developing transport infrastructure, aren’t you? Taxi ranks will mushroom around the shopping centres.
That’s correct and that’s why our relationship with the Taxi Associations is quite integral. Each of our centre managers has a weekly meeting with the Taxi Associations onsite to make sure that they’re being serviced and that they’re happy with the condition of where they operate from. We also had one shopping centre in KZN, called Bridge City in KwaMashu and there the railway actually stops underneath the shopping centre and that’s uplifted the community in many ways. It’s actually reduced the cost of transport significantly for the people of KwaMashu because they used to take the taxi and it used to cost them about R20 a day. Now the rail costs them R4–R5 a day.
Are other businesses springing up around the shopping centres, petrol stations for example, or maybe other shopping centres?
Yes, so for example Bridge was a great catalyst for development around us. We’ve seen subsequent to the shopping centre development there’s been a Regional Magistrates Court built just across the road. There’s a 100-bed clinic right next to us now, it’s a stone’s throw away and we’re seeing the development of a 400 bed, Provincial Hospital, being developed, which is probably going to be completed at the end of 2019. We see more and more offices also popping up behind our building, so yes, it’s really driving a stimulus in a region where nothing existed previously.
What about developing Municipal infrastructure, do you give that a boost?
Yes, so when the shopping centre comes online we normally pay rates on the property value and that contributes to the Municipality’s budget to upkeep and improve services around the region. What we also do is we try and engage with local Municipalities of how the fund, itself can contribute to help assist the Municipality to develop infrastructure because in certain areas, like in the Mpumalanga region, there might not be sewerage or appropriate sewerage lines in place and we often have to work in partnership with the Municipalities. I think we’re quite distinct in the market. We’re probably the only purely retail focused fund that focuses on shopping centres in townships and rural areas. If you had to go to the JSE these days, most of your property companies on the JSE are very diversified, so they don’t only own retail. They own offices and industrial, and if you look at the list of properties that are there now, 40% of the earnings of these companies is coming from offshore property investments, so there’s a lot more currency risk in that list of property than previously. We feel that our investors are safeguarded against those types of risk because it focuses on developing SA.
I suppose your investors realise now because of the longevity of the fund, the risk is greatly reduced.
Definitely, I these types of properties need to be micromanaged on a ground level and I think managing a shopping centre, for example, in the urban areas, like Sandton City or Cavendish Square is not as complicated as it is in the township or rural area because you’ve got the social and the environmental aspects that you have to really focus on.