Since 2017, Magnus Heystek-founded Brenthurst Wealth clients have owned no South African property investments. It’s been an excellent call, with asset values falling sharply in the past six years. Heystek explains in this interview why he regards SA property as the most destructive asset class, even though there are always exceptions (think migration to the Western Cape) – the reasons for remaining ultra bearish. He spoke to Alec Hogg of BizNews.
Magnus Heystek, on the reception to his article
Thank you to everybody who read the article. I had many reactions directly, questioning my motives and me. Why do I write these negative articles? Because I say, these are facts. And the investment community is not discussing them enough. And you know what prompted this article? I had a client a couple of weeks back. They came in and said to me, well, it’s one third cash, one third property, and one third equity. I said, no, no, no, that is old. Those days are gone. The third asset class, property has unfortunately undergone a severe and substantial correction. And I proceeded to mention Sandton City and Melrose Arch and those places and even the Fourways Mall, which is around the corner from me. And I tell them there’s been massive wealth destruction of those properties. They said it’s not possible, you know, beautiful buildings full of people must be a fantastic investment. Well, I showed him. That is if you take Sandton City, for example, which is part of the Liberty Two Degrees portfolio. Many people are investing in and advising Liberty structures in endowments, which was a fantastic investment until about ten years ago. You got inflation plus 4% year after year; what, 20 to 30 years ago? And it started changing ten years ago and then very severely over the last five years, you lost 35% of your money. Have you invested in the Liberty Two Degrees portfolio, which is probably the top property asset in South Africa? And you know, he was astounded. And then we look at his portfolio; he had 25% of his funds in property.
So, you know, these are the facts out there. And then, we proceeded to talk about the valuation of an Accelerate Property Fund, which is just around the corner from Fourways, and they have a lot of other properties even in the Waterfront. I told him that Accelerate Property Fund’s price is down 90% since its peak just after it was listed. And again, he couldn’t believe that a brick-and-mortar could lose so much money. And, of course, we started discussing why. These are purely financial reasons why markets were overvalued, and interest rates kept increasing. I’ll talk about the bond rates pushing up the property cap rate. But it’s more than that, unfortunately, and that’s the danger the fund managers will tell you, hang on, it’ll turn; it’s looking good. But one has to question the macro environment in South Africa for property as an investment class and listed property. Most parts of the country have changed so severely that it will never recover. I mean, because of the destruction of the municipalities, the missed allocation of funds, the theft, and the corruption. And, you know, the media are almost daily discussing the collapse of our cities, Durban, Pietermaritzburg, Pretoria, and Johannesburg. It is now in Financial Mail, and other publications openly say it’s falling apart. Investors also pay the price because a substantial percentage of their assets are losing value at an incredible and enormous speed.
On the property funds that have exclusively invested in the Western Cape
Spear is the one that’s primarily focused on the Western Cape and has done relatively better than the average listed property stock. But other factors influenced them: disposable income, working from home, and Covid hit everybody, and they probably recovered the quickest. When the market does get oversold, there will be some recovery. But one has to question this asset class and get the message to governments that their actions are destroying wealth. And ironically, the Accelerate Property Fund chairman Tito Mboweni is an ANC stalwart. He’s very much aware of the value disruption that’s taking place within the company. I’m sure they will discuss it. You could get that message to the government that they are busy destroying wealth by hoovering up money wherever they can, not spending money.
Yeah, we overused this statement for the expression closer to the edge. But in many parts, we’ve gone over the edge. I mean, the CBD in Jo’burg will never recover. Never, never, never recover. It’s just incredible what’s happened there. We’ve seen what happened to Berea and Hillbrow. When you start mismanaging an entity like property, and that one time that it’s destroyed, unfortunately, is happening in many parts of our country.
On the state of the retail and industrial sectors
Retail is under a lot of pressure. There might be turnover growth, but there’s no profit growth. And, of course, that was a consequence of the massive overbuilding of capacity 10-15 years ago. We always wanted another shopping centre, and we had one of the world’s highest concentrations of shopping centres per capita. And so there was oversupply. So retail is still something one would avoid. If you were bright in the property space, I think something like storage is probably the best bet, predictable income, and very low bad debts because if you don’t pay for your storage space, they throw your stuff out, and you don’t have to deal with tenants and foreclosures. It’s obvious you don’t pay out, so Stor-Age is a great company, and industrials, yes, that’s also done relatively better. But if you still want to venture into property, if you like that asset class, for whatever reason, there are some much better operators worldwide in Western Europe and the United States. And so, again, we come to this: where should I go? If I want this asset class? Where shall I go and buy this asset class? But for the time being, unfortunately, you know, I don’t say it with malice or glee. The commercial or listed property market is still an asset class that I am cautious to put money in.
Alec Hogg’s interview notes
Read also:
- Magnus Heystek – Property: a destroyer of wealth
- The 10 year picture: the results are in – Magnus Heystek
- Best of 2022: The trillion rand property collapse 2.0 – Magnus Heystek’s R500k+ Hartbeespoort mistake
