PROPERTY: Acquire Good Investments Offshore
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The current worldwide economic crisis will impact severely on the South African and international real estate sector causing perhaps one-third of the people currently employed in property related work – professionals, developers, contractors and, not least, estate agents – to have to find new jobs, but it carries with it the opportunity for canny investors to find exceptionally good new buys in the distressed international markets, says Mike Flax, Executive Director of Madison Property Fund Managers.Within 24 months, Flax predicts, 20% of Madison ’s turnover will be generated beyond South Africa ’s borders - a direct response to the current situation.Reviewing the events of the last few months in the financial world, Flax says that there is now absolutely no question that the USA and European recession is the worst in the last 80 years and will almost certainly make itself felt far longer than the relatively minor falloffs experienced in the 80s and 90s.
“There will inevitably be huge contractions in public and private spending,” says Flax, “and I think the impact of these will be felt for as long as five years. The proposed US $700 billion bailout of the banking sector in the USA will certainly take that amount of time to be paid off. Economic growth in most countries, including South Africa , will probably be dampened by at least 2%.”
All real estate players in South Africa , says Flax, will now have to tighten their belts and operate more leanly and more intelligently.
“In the last few years,” he says, “almost any developer, good or bad, who was able to get bank finance could make a fast buck. That time is now very definitely past.”
The most obvious (possibly the only) silver lining in the current scene, says Flax is that the South African non-residential development sector, with the exception of retail property, is still under-supplied and in this respect local developers are far better off than those of their First World colleagues.
“In the USA and the UK there is now such a glut of real estate that they have seen values drop by 20% – commercial rentals across the board have headed south and with some 200,000 bankers losing their jobs in the world’s financial centres (most of whom, it is said, have each helped support a further eight jobs) this is a catastrophic fallout which will lead to even more commercial space becoming available. By contrast in South Africa there is still a shortage of lettable space in the commercial and industrial fields - and the potential here is just good enough to ensure that the better developers do not take a hiding.”South African professionals, developers and contractors, says Flax, will now have to speed up the current trend of looking beyond South Africa’s borders – and will have to learn to handle the risks involved in this type of exercise.
“Particularly in Africa ,” he says, “there are numerous challenges to be faced: it is far more difficult to get land rights and working with the planning officials can be very time-consuming. However, these countries have a very real appetite for formal real estate and this has by no means yet been satisfied – so there are openings to do some really valuable and profitable work.”
Madison, says Flax, has already identified several opportunities in two African oil and mineral rich countries - Nigeria and the DRC - and has exciting projects already on the go in Namibia and Angola .
“The returns from this sort of African venture can be far higher than those in South Africa provided that one understands how to control the risks.”
Madison, says Flax, is also very definitely on the acquisition trail in the world’s hard hit property sectors, especially Australia and parts of Europe .
“Even acknowledging the huge risks involved, the plain truth is that in all likelihood never again will we get such fantastic buying opportunities, not only in direct property investment but also in the overseas listed property funds where the shares are trading at huge discounts to their net asset values. Certain financial institutions are exiting at any price and it would, in my view, be short-sighted not to examine the many opportunities that will be thrown up over the next year.”
Madison, says Flax, is now in the advanced stages of forming a vulture fund for South African investors, the object of which will be to make the most of the buying opportunities now available offshore - and this will have a targeted capital of US$ 400 million. Response to the new venture, he says, had been exceptionally positive with the result that the first real action is likely to be seen by early 2009.
“I think,” he says, “that it is now recognised that Madison is a market leader in active value management in real estate: we do not just buy into a company or fund, we join their teams and together help improve their performance.”
This approach, he says, had already proved valuable to Madison ’s managed funds: Hyprop, Redefine and Apex-Hi whose shareholders have “seen some of the best returns on the JSE in the 21st Century”. Much the same approach and involvement, Flax says, will be applied to any new fund or property purchase made either locally or offshore.
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