Finweek 8 October by New Media B2B

ECONOMY

HOW TO SPOT A FINANCIAL BUBBLE

COLLECTIVE INSIGHT

PROPERTY: EVERYTHING YOU NEED TO KNOW

COLLECTIVE

INSIGHT

INSIGHT INTO SA INVESTING FROM LEADING PROFESSIONALS OCTOBER 2020

THE PROPERTY EDITION Inside

THE INS AND OUTS OF INVESTIN G IN THIS ASSET CLASS

20 Introduction 22 All you need to know about real estate 24 The evolution of SA property 26 Real estate investing after lockdown – Doom and Zoom? 27 Worldwide property investment awaits investors 28 Moral precepts for fund management and the property sector 29 The opportunity cost of buying your first property 30 Housing as a verb 30 From big box to power box to cloud box 31 Household resilience is

INVESTMENT

WHEN CASH RETURNS DISAPPEAR

tied to the house

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ENGLISH EDITION

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contents

from the editor

JANA JACOBS

ecently, while watching a documentary on the Roman Empire, I was reminded of the origin of the term “milestone”. One of the key elements to the success of their empire was to connect it by building roads. They placed stone pillars called “obelisks” along these roadways, typically as mile markers. Milestones then. On 25 September, South Africa hit day 183 of the Covid-19-induced lockdown. The official six-month mark. Beyond the lockdown “milestone” of half a year, the end of September also ushered in the fourth quarter of this annus horribilis – with plenty of data being released to illustrate the impact this pandemic has had on our economy. But, as lockdown measures ease and we seem to be maintaining a nearly 90% recovery rate as we enter summer, there is a sense that we can start to move forward – while also being cognisant of the fact that many countries across the world have struggled to prevent second waves from locking them back in. And with the easing of restrictions, comes a little bit of hope. Perhaps being able to travel beyond provincial borders is a placebo – the true remedy against the fallout of this pandemic will require more than freedom of movement. Nonetheless, like many South Africans, I jumped at the chance to enjoy a change of scenery in September by taking advantage of creating a long weekend thanks to Heritage Day. The chosen escape route was down to KwaZulu-Natal’s South Coast. Travelling along the N3 between Johannesburg and Durban was no mean feat – having only driven in and around Johannesburg during lockdown, finding ourselves navigating what seemed like an endless supply of trucks was daunting. Of course, this stretch of highway is always busy with transport trucks, but this deluge seemed to signal the opening of the country’s economic arteries. (The sustainability of so many trucks on our highways aside.) At the same time, we observed the familiar landscape as we drove, looking out for some of the local haunts and family gems that served as markers on the road. Many were no longer there. A reminder of the hard hit our tourism sector has had to endure. Jobs lost and livelihoods decimated across the board. It’s going to be a long road to recovery for millions of South Africans – and our economy. Rome wasn’t built in a day. Hopefully, we can keep the arteries open so that we can reach more positive milestones. ■

Opinion

6 How to spot a financial bubble 7 A potent cure for xenophobia

In brief

8 News in numbers 10 Tackling the housing and rental affordability gap 11 The chrome miner ready to take off 12 The end of an era creeping closer

Marketplace

14 Fund in Focus: Investing in offshore multibaggers 15 House View: Sea Harvest, Transaction Capital 16 Killer Trade: Blue Label Telecoms, TFG 18 Invest DIY: The cost of choosing 32 Investment: Remember, remember, the third of November … 34 Invest DIY: What to do when cash returns disappear? 35 Markets: For now, betting on market risk has paid off 36 Simon Says: Anchor Capital, Grand Parade Investments, Hyprop, OneLogix, Pan African Resources, Purple Group, Tongaat Hulett, Woolworths 38 Technical Study: Gold bull not done running yet

Collective Insight

19 The property edition: The ins and outs of investing in this asset class

Cover

39 Agribusinesses’ changing playing field

On the money

44 Management: Burnout is now an ‘occupational phenomenon’ 45 Quiz and crossword 46 Piker

EDITORIAL & SALES Acting Editor Jana Jacobs Deputy Editor Jaco Visser Journalists and Contributors Simon Brown, Jacques Claassen, Lucas de Lange, Johan Fourie, Moxima Gama, Schalk Louw, David McKay, Maarten Mittner, Andile Ntingi, Timothy Rangongo, Melusi Tshabalala, Amanda Visser, Glenda Williams Sub-Editor Katrien Smit Editorial Assistant Thato Marolen Layout Artists David Kyslinger, Beku Mbotoli Advertising Paul Goddard 082 650 9231/paul@fivetwelve.co.za Clive Kotze 082 335 4957/clive@mediamatic.co.za 082 882 7375 Sales Executive Tanya Finch 082 961 9429/tanya@fivetwelve.co.za Publisher Sandra Ladas sandra.ladas@ newmedia.co.za General Manager Dev Naidoo Production Angela Silver angela.silver@newmedia.co.za Published by New Media, a division of Media24 (Pty) Ltd Johannesburg Office: Ground floor, Media Park, 69 Kingsway Avenue, Auckland Park, 2092 Postal Address: PO Box 784698, Sandton, Johannesburg, 2146 Tel: +27 (0)11 713 9601 Head Office: New Media House, 19 Bree Street, Cape Town, 8001 Postal Address: PO Box 440, Green Point, Cape Town, 8051 Tel: +27 (0)21 417 1111 Fax: +27 (0)21 417 1112 Email: newmedia@newmedia.co.za Printed by Novus Print Montague Gardens - Sheetfed & Digital and Distributed by On The Dot Website: http://www.fin24.com/finweek Overseas Subscribers: +27 21 405 1905/7

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THE COVID-19 CRISIS AND THE CRITICAL ROLE OF RESPONSIBLE INVESTING IN MOVING FORWARD Jon Duncan, Head of Responsible Investment at Old Mutual Investment Group

WHAT ARE THE LESSONS TO BE LEARNT FROM THE COVID CRISIS? Given the scale of the devastation, some investors might ask if it makes sense to rather focus on the “more critical” investment numbers right now and leave the soft ESG issues for after the crisis. However, if anything, the global pandemic and the subsequent economic and social crisis have strengthened the case for Responsible Investing (RI) and the critical role that it plays across all markets, and highlighted some invaluable lessons. LESSON 1: WE’RE ALL INTERCONNECTED One of the fundamentals of RI is the interconnected nature of our different market ecosystems. RI recognises the impact of unpriced externalities on markets and asks all investment value chain participants to consider long-term system resilience over pursuing short-term returns at the expense of social and environmental systems. Examples include the social and environmental costs of burning fossil fuels or societal health impacts of high-calorie foods. The COVID-19 crisis has laid bare the very real interconnectivity between our social, environmental and market systems and the lesson here is don’t neglect this interconnectivity.

LESSON 2: SHARED VALUE A shared value strategy requires businesses to consider a range of stakeholders and the associated business “impacts”. This is a departure from the old adage that the business of business is business. COVID-19 has been indiscriminate in whom it impacts, so it has become everyone’s problem. Those with the best chance of fighting it are doing so collaboratively across a broad range of stakeholders, as well as having deeply integrated ESG processes to achieve shared value outcomes. LESSON 3: UNDERSTANDING THE SCIENCE RI relies on scientific data to make the business case for sustainability. Most asset managers with a focus on RI understand the science behind climate change and the attendant risks and opportunities. Although the COVID-19 crisis is more immediate compared to climate change, it is interesting to see how rapidly political leaders have adhered to medical and scientific consensus. The lesson here is don’t forget the science and utilise asset managers with these specialist skills. WHAT COMES NEXT? The COVID-19 pandemic is unprecedented in modern times and there is much we don’t know about how this will play out. However, we do know that the world will be much changed. We will have an enhanced sense of interconnectivity and those businesses with a greater focus on long-term outcomes over just returns will be remembered. The time is now for financial services to realign its understanding of RI and ESG issues and how they impact long-term risk and returns, as well as the ability to attract, retain and grow capital. To answer more of your investment related questions, contact us at futurematters@oldmutalinvest.com or visit www.oldmutualinvest.com for more news and insights.

INVESTMENT GROUP 175 YEARS OF DOING GREAT THINGS Old Mutual Investment Group (Pty) Ltd (Reg No 1993/003023/07) is a licensed financial services provider, FSP 604, approved by the Financial Sector Conduct Authority (www.fsca.co.za) to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. Old Mutual Investment Group (Pty) Ltd is wholly owned by the Old Mutual Investment Group Holdings (Pty) Ltd.

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As South Africa experiences an easing of the onslaught of the COVID-19 virus, the crisis this leaves behind has wreaked havoc across global markets and has taken a massive personal toll on individuals. Property markets are also affected, with the residential property market declining as the economy flounders and the future of commercial property in question with businesses increasingly moving towards more permanent remote working models.

opinion

By Johan Fourie

ECONOMY

How to spot a financial bubble

Rapid increases in asset prices are driven by universal factors. ne of the most influential mathematicians of all time, Sir Isaac Newton, lost a fortune by investing in the South Sea Bubble of 1720. When asked why, with all his mathematical prowess, he could not foresee the collapse of the stock, he is reputed to have said that ‘he could not calculate the madness of the people’. And who can blame him for being unable to understand the seemingly irrational behaviour of hundreds or thousands or, sometimes, millions of people – the madness of crowds, as the journalist Charles Mackay coined the phrase in an 1841 bestseller on financial bubbles. Mackay’s nineteenth century interpretation for why bubbles occur is still how most of us would explain the spectacular and seemingly inexorable rise of asset prices during a bubble. Think of the dotcom bubble of the early 2000s. Or the housing bubble that caused the Great Recession of 2008. Or, most recently, the bitcoin bubble. At the start of 2017, the price of bitcoin was below $1 000. By its end, it was $20 000 and there was wide speculation that it could go much higher because – and this is a frequent associate of bubble rhetoric – ‘this time is different’. It was not. Bitcoin lost 72% of its value the next year. Economists’ explanations have become somewhat more sophisticated since Mackay’s days. Nobel laureate Robert Shiller argues that bubbles can largely be explained by behavioural economics. The ‘irrational’ behaviour of investors, he argues, can be attributed to cognitive failings and psychological biases that cause prices to rise beyond their objective value. Or it may be because a small group of investors suffer from overconfidence bias, overestimating the future performance of an asset class. Or they may suffer from representativeness bias when investors erroneously extrapolate good news and overreact. But a new book – Boom and Bust: A Global History of Financial Bubbles, by financial historians William Quinn and John Turner – argues that the focus on individual biases are insufficient to explain why financial bubbles continue to occur regularly three centuries after Newton lost his fortune. They attribute bubbles instead to three features of assets themselves: marketability, money and credit, and speculation. Marketability is the ease with which an asset can be freely bought and sold. An asset that can be legally bought and sold is more likely to be traded. An asset that is divisible in smaller quantities will also increase tradability. The ease of finding a buyer or seller and the ease with which the asset can be transported matter. The second factor necessary for a bubble is money and credit. As Quinn and Turner note, “a bubble can form only when the public has sufficient capital to invest in the asset and is therefore much more likely to occur when there is abundant money and credit in the economy”.

Therefore, periods of low interest rates and loose credit conditions are far more likely to stimulate the growth of bubbles. Low interest rates on traditional assets may, for example, force investors to ‘reach for yields’, driving them to riskier assets. The third factor is speculation. Of course, speculation is always present; there are always investors hoping to buy low and sell high. What happens during a bubble, though, is that large numbers of novices become speculators, “many of whom trade purely on momentum, buying when prices are rising and selling when prices are falling”. These three factors are necessary but not sufficient for asset bubbles. Nobel laureate Vernon Smith said that the spark that ignite bubbles is a mystery. But the authors claim that by studying financial bubbles in history, they have identified the two things that can spark bubbles: technological change and political interference. New technologies allow innovative firms to generate abnormal profits that lead to large capital gains in their shares. Many early investors in these innovative firms buy shares with the expectation that prices will go up. Because the technology is new and its potential impact largely unknown, these overoptimistic estimates can fuel a bubble. Government policies, on the other hand, are often designed with the explicit goal of driving up prices. This is usually to enrich some politically important group. Many of the first bubbles, like the South Sea Company, were engineered as part of elaborate schemes to reduce the public debt. But not all government policies have devious intentions. Policy changes are sometimes an attempt to reshape society in a way that the government deems desirable, with unintended consequences. The authors note, for example, that housing bubbles are often sparked by politicians’ desire to increase homeownership. Given all these factors that affect asset bubbles, it is no surprise that they come in many shapes and sizes in history, from Tulipmania in the 1630s to bitcoin two years ago. Many would even argue that tech stocks – like Tesla shares, which have increased more than five-fold since the start of the year – are entering a bubble. And it makes sense: tech companies’ shares are marketable, interest rates are low, and many new investors are joining as speculators, hoping to buy low and sell high. Technological innovations (a new battery!) create uncertainty about potential abnormal profits, and government policies like expansionary monetary and fiscal regimes further fuel the search for yield. The one thing we do not understand well, though, is just when and why bubbles pop. At some stage, Quinn and Turner conclude, the money and credit dry up. The number of new potential investors is finite. But this seems rather vague. It is a conundrum that Sir Isaac Newton would have known only too well. Perhaps it is indeed impossible to calculate with any precision the madness of crowds. ■ editorial@finweek.co.za

Photo: Gallo/Getty Images

Given all these factors that affect asset bubbles, it is no surprise that they come in many shapes and sizes in history, from Tulipmania in the 1630s to bitcoin two years ago.

finweek 8 October 2020

Johan Fourie is professor in economics at Stellenbosch University.

www.fin24.com/finweek

By Andile Ntingi

opinion

XXXXXXXXXXXXXX POLICY

A potent cure for xenophobia

Photo: Shutterstock

South Africa’s decade-long economic slump is stirring anti-immigrant sentiment. hen economic growth grounded to a halt in the aftermath of the global recession in 2009, competition for scarce resources intensified between South Africans and immigrants, contributing to the resentment of the latter, who are often accused of stealing jobs from the locals. This resentment sparks sporadic xenophobic attacks, some of which have been deadly and resulted in the displacement of foreign nationals. These attacks, which occurred in 2008, 2015, and 2019, are more pronounced in poor communities who live in squatter camps, townships, and the inner cities. These communities are usually plagued by high unemployment, poverty, crime, corruption, and inept service delivery. However, in recent months the anti-immigrant sentiment has reared its ugly head again, this time spreading to sections of society not normally associated with xenophobia. The popular Twitter account Lerato Pillay has contributed to stoking anti-immigrant narratives on social media. The account (@uLerato_Pillay) has popularised “#PutSouthAfricansFirst” since its creation in November last year to a point that middle-class South Africans are beginning to latch on to this narrative. The campaign is also getting support from conservative political parties, like the African Transformation Movement (ATM), led by parliamentarian Vuyo Zungula, and newly-established ActionSA, masterminded by former Johannesburg mayor Herman Mashaba. Black business chamber Nafcoc, which has been calling for a clampdown on participation of foreign shopkeepers in the spaza shop market, is also behind the #PutSouthAfricansFirst campaign. At the time of writing, the ATM was planning to lead a protest march in Tshwane on 28 September to hand over a memorandum to the department of home affairs, calling for a tightening of immigration laws to curb illegal immigration. The campaign also gained traction at the height of a strike by local truck drivers in July against the hiring of immigrants in their sector. The resurgence of xenophobia has alarmed organisations like the Centre for Analytics and Behavioural Change (CABC), which has been tracking the @uLerato_Pillay account. The centre has established that before the account was created, anti-immigrant conversations on Twitter averaged around 250 posts a day. This figure has now jumped to 30 000 posts a day and on extremely busy days, it leaps to 80 000 posts. These posts blame immigrants for taking jobs from locals and often hurl insults at EFF leader Julius Malema for supporting the idea of a borderless Africa. Although this growing anti-immigrant sentiment is often described in social and traditional media as xenophobia, I view it as economic nationalism, borne from a growing backlash against globalisation across the world. This anti-globalisation movement has already had serious political ramifications. It started with Britain voting in a referendum in 2016 to leave the EU and has been gaining momentum ever since. The so-called Brexit was followed by the rise of Donald Trump as a political juggernaut in the US, which culminated in him winning the @finweek

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presidential elections in November 2016. Although many political pundits have pointed out that the people who embraced Trump and Brexit are xenophobes, there is a counterargument that the supporters of these right-wing political movements are actually patriotic economic nationalists, many of whom have been dealt the worst hand by globalisation. In both countries, these victims are mainly white, working-class citizens, who are either unemployed or have seen their standard of living drop due to stagnant wages. In Britain, Brexit voters wanted an end to unrestricted immigration from the EU, while Trump supporters wanted a “wall” built between the US and Mexico to block illegal immigrants from Latin American countries entering the US. Trump supporters also yearned for high tariffs to be imposed on cheap Chinese imports that outcompeted American products, causing de-industrialisation, particularly in the steel sector – once a major employer in the US. These anti-globalisation yearnings were reflected in Trump’s presidential inauguration speech in January 2017 when he unveiled the “America First” policy that signalled a shift by the US from outward-looking to trade protectionism. This shift also signalled the beginning of an end in globalisation, which has dominated economic thinking for the past 30 years. Pro-globalisation thinkers believe that labour and capital must be able to move across borders without any hindrance, just like goods and services. Proponents of globalisation argue that allowing labour to move where wages are higher has enormous benefits. It boosts competition and efficiency, thereby reducing prices of goods and services for consumers. However, anti-globalisation critics counter that this unregulated competition damages indigenous working classes in countries that host foreign labour and capital. The clash between proponents of globalisation and economic nationalism is also playing itself out in SA. Here, the supporters of the #PutSouthAfricansFirst campaign appear to be prodding the government to discourage an influx of foreign labour into the country through restricting illegal immigration. With the Covid-19 pandemic having worsened unemployment and inequality, we are likely to see the campaign being stepped up in the postlockdown era when the economy is fully reopened. There is no denying that political pressure is building over the immigration issue – as shown by the government’s willingness to make amendments to legislation governing immigration, the granting of citizenship and refugee status. The battle lines are clearly drawn over these looming amendments. A potent cure for xenophobia is economic growth. SA will have to find the growth that has been elusive for the last decade due to a lack of investment, corruption, and the decline in mining and manufacturing, which once provided employment to many South Africans. ■ editorial@finweek.co.za Andile Ntingi is the chief executive and co-founder of GetBiz, an e-procurement and tender notification service.

finweek 8 October 2020

“THE EDGARS BUSINESS STARTED SHIFTING TOO NICHE AND, ULTIMATELY, IT TOOK THE BIG-BOX RETAILER FURTHER AND FURTHER AWAY FROM THE AVERAGE SOUTH AFRICAN.”

− Norman Drieselmann, CEO of retailer Retailability, which closed a deal to acquire 130 of 194 Edgars stores. In an interview with Reuters he explained the plans are to reposition Edgars as a mass market brand, retailing fashion and beauty products, and to exit its homeware division. This new strategy will entail getting the right balance between private labels and international brands that have recognition in the local market and have the right value proposition, he said. 8

finweek 8 October 2020

“I DIDN’T KNOW.” − Mosebenzi Zwane, former MEC for housing in the Free State, said he didn’t know that the Housing Act existed, and he never read it. Zwane was testifying before the state capture commission regarding his oversight role and allegations that he illegally pushed for over 100 contractors to be appointed Mosebenzi Zwane to build 14 000 houses as part of a R1.4bn Free State housing project. Illegal prepayments to contractors and suppliers for work not delivered were made. He admitted that the appointment of contractors outside an open tender process was wrong, but said the go-ahead was given by the provincial executive council at the time, led by then premier and current ANC secretarygeneral, Ace Magashule, reported IOL.

“I am surprised that South Africa is not seeing any major equity capital raises.” − Simon Denny, head of Barclays South Africa, told Reuters that economic conditions were expected to trigger a round of equity capital raising from around December. SA is set to see a wave of equity fundraising as banks’ capacity to lend is under strain from rising bad debts, just as corporations need funds to cope with the fallout from the coronavirus pandemic. He said the economic environment is not going to be conducive (for lending) anytime soon and debt levels will increase over the next six months. www.fin24.com/finweek

Photos: Gallo/Getty Images

in brief

>> Listed Property: Filling the gaps in affordability p.10 >> Mining: PGM price run pushes Tharisa into the limelight p.11 >> Johannesburg’s iconic mining district soon to be no more p.12

THE GOOD

DOUBLE TAKE

BY RICO

The minister of mineral resources and energy, Gwede Mantashe, has gazetted approval to add new electricity generation to the national grid. The country is currently facing a power supply crisis and the expeditious procurement of energy into the national grid is critical to support economic recovery. He said Eskom will buy at least 6 800MW of solar and wind power from independent power producers from 2022. The publication of the energy allocations paves the way for opening of a long-awaited round five of the bid window, under the government’s delayed Renewable Energy Independent Power Producers Procurement Programme.

THE BAD SAA Technical, a subsidiary of the national carrier that provides critical maintenance services, including inspections required before a flight can take off, said in a letter that it had taken the decision to withdraw its services to its parent after the struggling airline failed to pay money it owes for services rendered. SAA spokesperson Tlali Tlali told eNCA that while the national airline was not operating commercial flights, repatriation flights for South Africans who have been stuck overseas due to the coronavirus pandemic, as well as some charter flights, could be interrupted if SAA Technical does not restore its services.

THE UGLY

PAY DOCKED

3 months

President Cyril Ramaphosa imposed a threemonth salary freeze on defence minister Nosiviwe Mapisa-Nqakula from 1 November to recoup the state money spent flying ANC officials to Zimbabwe on an air force private jet, according to the Presidency in a statement. The defence force had argued that Mapisa-Nqakula was on official business and had simply given the other passengers, including ANC secretary-general Ace Magashule, a lift. The ruling party’s delegation was heading to Harare for crisis talks with Zimbabwe’s ruling Zanu-PF party, which were aimed at helping tackle the country’s political and economic woes. Opposition parties argued that the Presidency’s corrective measures were not enough. WORKER INCOME LOST

Vimal Ranchhod, economics professor at the University of Cape Town and co-principal investigator, told The Wall Street Journal that reported job losses from a recent survey by a group of academics of 7 000 South Africans showed layoffs surpassed those of the 2008-2009 global economic crisis. In April, the most recent month for which data is available, 43% of black workers were laid off or furloughed, compared with 17% of white workers. About 47% of all households said they ran out of money to buy food. “It does raise questions of how much a society can sustain,” remarked Ranchhod. @finweek

finweek

-10.7%

The income of workers across the world will have fallen by an average of 10.7% in the first nine months of this year compared with the same period last year, according to the International Labour Organization. That amounts to $3.5tr, or 5.5%, of global GDP for the first three quarters of 2019. The percentage of working hours lost because of Covid-19 is most acute in Latin America, followed by South Asia. Southern Africa lost a staggering 20.3% of working hours in the second quarter of 2020 and 14.2% in the third. Global working-hour losses are expected to amount to 8.6% in the fourth quarter of 2020.

finweekmagazine

POST OFFICE SHORT TO PAY GRANTS

R1bn

The SA Post Office is pleading to its own subsidiary, Postbank, for R1bn to process 13m social grants in early October, reported City Press. Acting chief financial officer Lenny Govender wrote to the Post Office board spelling out the company’s dire financial position. The cry for help comes months after the Post Office’s appeal to communications minister Stella Ndabeni-Abrahams for R1.8bn so that it could distribute grants, went unanswered. Post Office board member Colleen Makhubele reportedly warned the minister reserves are being depleted and that the company would have to resort to using credit facilities at commercial banks that would involve interest charges ranging between R10m to R17m per month. THE DEVIOUS DODGER

$750

According to a report by The New York Times, US President Donald Trump allegedly paid $750 in federal income taxes in 2016 (the year he took office), and again in 2017. It also says that he paid no income taxes at all in ten of the previous 15 years, citing heavy losses from his business enterprises to offset hundreds of millions of dollars in income. Trump called the report “fake news” while the newspaper said the information scrutinised was “provided by sources with legal access to it”. Though it is not required by law, Trump is the first president since the 1970s not to make his tax returns public. finweek 8 October 2020

in brief in the news By Glenda Williams

LISTED PROPERTY

Tackling the housing and rental affordability gap

SA’s listed residential assets market is small compared with international peers. This might be changing. SE-listed Balwin Properties is no stranger to developing large sectional title estates. But its next project, Mooikloof Mega City, is on a scale rarely seen. In what could be the world’s largest sectional title development, with a value of around R44bn, the colossal inclusionary housing project located east of Pretoria could count a total of 50 000 apartments. Asked how confident he is the 50 000-figure will be met, Balwin Properties CEO Steve Brookes replies: “100%.” Mooikloof Mega City, a green-model development supported by government as a strategic integrated project, has been designed specifically for the gap housing market. It means housing opportunities for people earning a combined monthly income between R3 501 and R18 000. These income earners earn too much to get a free house from government and too little to get a bond from a bank. It’s a new market for Balwin. “We needed to create a brand for people who earn a certain income, so we created our Green brand. Because of our EDGE certification, buyers get a reduction in their mortgage rate,” Brookes tells finweek. First-time home buyers and qualifying individuals will have assistance through the Finance-Linked Individual Subsidy Programme (Flisp). Flisp grants first-time home buyers a subsidy of between R27 960 and R121 626. Balwin has acquired 210ha, costing R332.5m, for the project, which will be developed in multiple phases. Mooikloof Mega City, 70% owned by Balwin, will consist of a residential component, two educational facilities and a commercial node. Balwin will undertake the residential developments and will sell approximately 20ha for the development of educational facilities and a commercial node. Government is carrying the R1.4bn cost of external bulk services. Mooikloof Mega City’s 30% shareholding balance is owned by joint venture partners. Brookes remains mum on who those equity partners are. Balwin will initially develop 16 000 green-model residential apartments over five developments; the first portion, already underway, launched on 3 October. These 2 500 EDGE-certified apartments – ranging in price from R499 000 for a studio to R799 000 for a three-bedroom, two-bathroom apartment – will be ready for occupation on 1 February 2021. Balwin is adding external and internal amenities to its lower-cost brand with a secure entrance, treelined boulevard, 24hr concierge, and a lifestyle centre that includes a heated pool, outdoor gyms, a laundromat, pizzeria, and herb garden. “The legacy is to improve previously disadvantaged

people into housing that doesn’t look like rows of RDP housing; so, something they can be proud of, something that can create wealth for them,” Brookes tells finweek. Over the life cycle of the project, Mooikloof Mega City will provide approximately 115 000 direct and indirect jobs. “We are very proud to help this country in some small way to improve the economy,” he says.

Reviving inner-city living

Steve Brookes CEO of Balwin Properties

Balwin may be concentrating on the lower-income homeowner, but Divercity Urban Property Fund’s inner-city development focuses on the lower-income renter. Spanning six city blocks that were the former heart of the diamond and precious metals trade in Johannesburg, lies Divercity’s newly-launched Jewel City. Vacant for decades, a R1.8bn redevelopment has transformed this extension of Maboneng into a mixeduse quarter. The revitalised, fully-pedestrianised and security-patrolled precinct is amenity-rich and includes lawns, play areas, schools, clinic, gym, bank, restaurants and convenience retail. And it is reviving inner-city living with its modern and affordable residential spaces. Aside from the fullylet retail space and 20 000m2 of commercial space, Jewel City consists of 2 700 apartments: 1 550 of those in two new residential buildings. ‘The Diamond’ is a six-storey converted office block, ‘The Onyx’ a newly-built 11-storey building. Rentals for these apartments start at R3 499 per month for a bachelor to R5 799 for a two-bed, one-bath unit. Prepaid electricity and metered water from energy-efficient heat pumps have been employed to boost affordability and minimise operating costs. Covid-19 was expected to put a dent in letting aims. But if a precinct is safe, well-managed, energetic and affordable, people will want to live there. Unsurprisingly, about 1 000 units were let even before the official launch on 24 September. “The pace of letting has astonished us,” Carel Kleynhans, CEO of Divercity, tells finweek, saying that 70% of new tenants are from outside the central business district. Divercity, whose assets stand at over R3bn, aims to list when that number is closer to R10bn. Residential as an asset class exists in most welldeveloped property investment markets. But SA is significantly underweighted in this relative to its international peers. “Residential as an asset class is poorly understood … and there is shortage of investable stock,” says Kleynhans. ■ editorial@finweek.co.za

Photos: Supplied

“The legacy is to improve previously disadvantaged people into housing that doesn’t look like rows of RDP housing.”

finweek 8 October 2020

Carel Kleynhans CEO of Divercity

www.fin24.com/finweek

in brief in the news By David McKay

MINING XXXXXXXXXXXXX

The chrome miner ready to take off

Tharisa is usually overlooked by investors, but its platinum group metals may push it into the limelight. harisa, a company listed in London and Johannesburg, has gone under the radar, according to a UK brokerage that thinks the South African firm’s exposure to the chrome market, and platinum group metals (PGMs), positions it for a value lift over the next two years. Peter Mallin-Jones and Tim Huff, analysts for investment bank Peel Hunt, say Tharisa must still benefit from a full year of PGM prices, assuming their current, elevated levels are maintained, especially in palladium and rhodium. Bear in mind the basket price for Tharisa’s PGM mix has increased from $900 an ounce in early 2018 to $2 300/oz today. In fact, Tharisa’s future PGM contribution to revenue could match the entire revenue number of chrome and PGMs of recent years. That provides a sense of the scale-up provided by the PGM price run. But Tharisa primarily produces chrome, at least by volume. So, what of that? Chrome output of 1.3m tonnes currently could rise eventually to 2m tonnes following completion of an expansion to its processing facilities – known somewhat theatrically as Vulcan – while there will be a short-term uplift in volume to about 1.5m tonnes. Chrome is supplied to the stainless steel

industry, mostly in China, where demand growth is expected to be in the region of 2% to 3% a year. The interesting point about chrome, though, is that SA production has been on the wane for the past two years. This is partly owing to price, but largely down to Eskom-administered tariffs. The largest ferrochrome producer, the Glencore-Merafe joint venture, opened restructuring discussions with unions in January over its 430 000 tonnes a year ferrochrome smelter. It then confirmed in September it was in discussions to reduce its workforce by about 1 000 people. Merafe Resources also registered a R1.3bn write-down of its 20% share of the assets. The joint venture has capacity of over 2.3m tonnes of ferrochrome annually. “At this point, we see the Tharisa group in a very strong position,” the Peel Hunt analysts said. “It will have a highly-efficient, low-cost operation, generating strong free cash flows. We expect a strong balance sheet through the build, allowing returns to investors,” they said. If they are right, shares in Tharisa could rise to between 165 pence and 195 pence apiece, which compares with a current price of 74.95 pence in London. ■ editorial@finweek.co.za

Tharisa’s chrome operations

Chrome output of 1.3m tonnes currently could rise eventually to 2m tonnes following completion of an expansion to its processing facilities.

Photos: tharisa.com | Gallo/Getty Images

MAYBE LOOK AT HOME, HARMONY? “inorganic growth acquisitions”. Harmony Gold’s declaration that it would retool its African growth strategy The report recommends the use of “advanced analytics to assess a wide seems interestingly timed as executives throughout the industry range of data sources, including drill logs, geological models and have adopted a position of ‘watchful, but doubtful’ over unstructured map analysis”. merger and acquisition activity. That’s because the That sounds very much like consultancy-speak, but current price of gold means this might be the top of the the benefit of looking closer to home in a brownfields market, making potential targets expensive to buy. expansion might be an option for Harmony, which That would ruin Harmony’s recent track has ample gold resources on its doorstep. SA has record. Its purchase of Mponeng and Mine Waste significant gold, at a very deep level, that could be Solutions from AngloGold Ashanti for a total cash nonetheless incentivised by the gold price. and revenue share of $470m was equal to $83 According to Harmony’s latest reserve and resource per equivalent gold ounce reserve. This compares statement, it has 22.2m ounces in measured resource, with $98/oz reserve paid by Newmont Mining, demonstrating a high level of economic confidence a US company, for Goldcorp and $277/oz paid by compared with the 18.5m ounces in “total” mineral resources Chinese firm Zijn for Continental Gold. in its Papua New Guinea portfolio, which includes the categories According to a report by McKinsey & Co, a consultancy, Harmony Gold’s of indicated and inferred mineral resources about which there is top among the CEO in-tray in the gold sector is “innovations Doornkop mine west of Johannesburg. in organic growth exploration” above the imperative of less economic confidence. ■

@finweek

finweek

finweekmagazine

finweek 8 October 2020

in brief in the news By David McKay

MINING

The end of an era creeping closer

The exodus of mining corporations from Johannesburg’s central business district is almost complete. AngloGold Ashanti’s headquarters in Newtown, Johannesburg

outh Africa’s mining ‘houses’ were so described to convey the sense of sprawling corporatisation that through time came to typify the ownership patterns of the country’s mineral resources. But to call a thing a house also suggests a certain physical confidence. Thus, Johannesburg’s Main Street had its tapestried Anglo American headquarters; Fox Street was where Gold Fields of SA resided with its airy, marbled reception in front of which the bust of founder Cecil John Rhodes stood, atop a plinth; a piece of statuary that would surely be in jeopardy today. Consolidated Building, opposite the JCI building on Harrison Street (until it was sold for R6m following the company’s dissolution) contained a charming, hand-operated lift, reputed to date from when Johannesburg really was just a mining town. All history now, especially as Anglo American confirmed in an email that it was pressing ahead with its move to new offices in Rosebank from Johannesburg’s CBD, notwithstanding the adoption of work-from-home practices that will continue after the Covid-19 pandemic. “The move is still proceeding as planned, for next year,” said Sibusiso Tshabalala, spokesperson for Anglo American. The focus is now on managing Covid-19’s impact on employee health risks. “In the interim, most of our corporate office employees in SA continue to work from home, in line with the guidance provided by government,” he says. Further afield, flexible work-from-home arrangements will be put in place. They had already been in development before the pandemic, says Tshabalala. Now there will be more “options” for it, he says.

Gold Fields, which has its origin in the nineties-era merger of Gencor with GFSA gold assets, long decamped to Sandton from central Johannesburg into a building former Gencor boss, Brian Gilbertson, once described as “functional yet comfortable”. That building, however, is emptier than before. “We are offering the return to office work from October, and from next year a flexible work week,” says Sven Lunsche, spokesperson for Gold Fields. “I’m not sure how well that will be adopted, but I expect about half of the total office will take it up.” As for the Sandton office, there’s still “a few years” left on the lease, so that will remain for the time being. But the fact that WeWork-type offices are available across the road from Anglo’s proposed head office in Rosebank might be more appropriate. The last mining company still to operate out of central Johannesburg, AngloGold Ashanti, has pledged to retain its South African presence despite having ambitions to take a primary listing in New York or London, eventually. An attempt to dissuade the group from upping sticks was made by government which threatened – but failed – to make it a condition of AngloGold’s $300m sale of SA assets to Harmony Gold. AngloGold Ashanti spokesperson Stewart Bailey says the SA office makes sense from a cost and logistics point of view, so its local presence is here to stay. But its ‘turbine hall’ offices in Johannesburg’s Newtown, which date from the 1920s, haven’t been full since successive restructurings between 2016 and 2018. Its lease is due to expire in 18 months, after which the last of the mining houses potentially bids its final adieu to central Johannesburg. ■ editorial@finweek.co.za

Photo: Gallo/Getty Images

Anglo American confirmed it was pressing ahead with its move to offices in Rosebank from Johannesburg’s CBD.

finweek 8 October 2020

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market place

>> >> >> >> >> >> >>

House View: Sea Harvest, Transaction Capital p.15 Killer Trade: Blue Label Telecoms, TFG p.16 Invest DIY: The decision-making dilemma p.18 Investment: Betting on physical gold p.32 Invest DIY: What are income-based investors to do with interest rates so low? p.34 Markets: Big tech to the rescue, but it’s risky p.35 Simon Says: Anchor Capital, Grand Parade Investments, Hyprop, OneLogix, Pan African Resources, Purple Group, Tongaat Hulett, Woolworths p.36 >> Technical Study: Further new highs possible for gold p.38

FUND IN FOCUS: ANCHOR BCI GLOBAL EQUITY FEEDER FUND

By Timothy Rangongo

Investing in offshore multi-baggers

Seeking capital growth over the long term by investing in a portfolio of high-quality, attractively-valued companies. Fund manager insights:

FUND INFORMATION:

Benchmark: Fund manager:

MSCI All Country World Index Nick Dennis

Fund classification:

Global – Equity – General

Total investment charge:

2.15%

Fund size:

R401.5m

Minimum lump sum/ administration fees:

None/Fixed administration fee of R15 excluding VAT which applies to all direct investor accounts with balances of less than R100 000 at month-end 011 591 0677/info@anchorcapital.co.za

Contact details:

TOP 10 HOLDINGS AS AT 31 AUGUST 2020:

Sea Limited

8.1%

Alibaba

7.1%

Netflix

6.4%

Amazon

Wix.com

5.6%

Spotify

4.6%

Etsy

4.6%

MercadoLibre

4.3%

Meituan Dianping

4.2%

Mastercard

4.2%

TOTAL

55.1%

PERFORMANCE (ANNUALISED AFTER FEES)

as at 31 August 2020: ■ Anchor BCI Global Equity Feeder Fund

■ Benchmark

100 80

83.2%

60 40

20.5%

1 year

finweek 8 October 2020

92.7%

Why finweek would consider adding it:

29.8%

The fund seeks to provide capital growth over the long term to investors by investing in a portfolio of high-quality, growing companies that are attractively valued. The companies it invests in are selected from both developed and emerging markets. The majority of the fund’s assets have been invested in developed markets, which in turn drove the bulk of the fund’s performance, according to fund manager Nick Dennis. Notwithstanding, the fund’s positions in emerging markets have also delivered returns in 2020. Dennis says the fund seeks to invest in potential “multi-baggers”, which he explains as companies (or shares) that could grow to multiples of their current size over the next five to ten years. One such multi-bagger is Meituan Dianping, a Chinese app that “wants to become the Amazon of services as part of its mission to help people eat and live better”. The fund started buying Meituan in early February 2020 and it contributed towards the fund’s 2.2 percentage point increase in monthly returns in August. Meituan rose 33% (in dollar) in August, upon delivering better than expected second quarter results. Its revenue and operating profit increased by 8.9% and 95.5% year-onyear, respectively. Meituan used the Covid-19 crisis to of the portfolio is its benefit. It worked with local Chinese held offshore. municipalities to distribute consumption vouchers, entrenching its position as a partner for both government and business. “Global markets provide a deep pool when fishing for these opportunities which just can’t be matched locally. The fund isn’t a general equity fund in the sense that it is relatively concentrated and isn’t diversified along traditional sector lines. Instead, the emphasis is on each company having its own long-term idiosyncratic drivers,” says Dennis about the portfolio, of which 92.7% is held offshore. The fund carries greater risk due to its high exposure to global equity markets and volatility. Due to its high offshore exposure, the portfolio is also exposed to currency risk. Therefore, it is suitable for long-term investment horizons. In terms of some of the biggest challenges faced by the fund, apart from taking action to prevent regulatory breaches, such as limits to position sizes, Dennis says “the aim is by and large to leave the holdings alone”.

14.4%

Since inception in November 2015

The fund provides full exposure to shares listed in global markets outside South Africa. It is biased to developed markets and actively seeks out attractively-valued shares to maximise long-term growth. ■ editorial@finweek.co.za www.fin24.com/finweek

house houseview view SEA HARVEST XXXXXXXXXXXXXXXX

BUY

SELL

marketplace

HOLD

By Simon Brown

Catching the tides

Last trade ideas

I always like the idea of a fishing business: it’s a cheap protein for consumers and catch quotas create a moat around the industry. The JSE has three fishing stocks, but Premier Fishing has lagged since listing three years ago, and Oceana is a serial disappointer. Recently, Sea Harvest’s results for the six months ended June showed a solid performance. The pandemic hurt its operations, despite being categorised as an essential service. Overall, the cost of Covid-19 during the reporting period was around R30m. As we move into less strict lockdown levels, this expense should reduce, and profit improve. Even with increased costs from the pandemic, gross margins remained in place at around 33%. The company’s aquaculture division is still making a loss, but by the end of the financial year in December it should start delivering on the promised profits. New fishing quotas will be issued locally next year, and Sea Harvest is well-placed and may even pick up some permits, giving it extra potential. This is not a stock that will ever shoot the lights out, but it is a different type of business to add diversity to a long-term portfolio. ■

TRANSACTION CAPITAL

BUY

SELL

BUY

Aspen Pharmacare 24 September issue

BUY

PSG 10 September issue

BUY

Distell 27 August issue

BUY

Shoprite 13 August issue

HOLD

By Moxima Gama

Trying to return to bull trend

Photos: seaharvest.co.za | Atterbury Property

Transaction Capital (TCP) is an active strategic investor in high-potential businesses in credit recovery and related services. The company’s segments include SA Taxi and Transition Capital Risks Services (TCRS). SA Taxi finances, sells and repairs minibus taxis, and TCRS is a debt collection service that accounts for almost half of Transaction’s earnings. Its principal investment in Australia is Recoveriescorp, which is a professional debt purchase and debt recovery service. Transaction Capital announced in September that it concluded a subscription deal to buy a 49.9% stake in automotive retailer WeBuyCars.co.za for R1.84bn. Chief executive David Hurwitz described the investment as value-accretive that will convert interest income on the company’s deployed capital into higheryielding operating earnings, which will accelerate Transaction Capital’s earnings growth rate. How to trade it: TCP traded out of its primary bull trend during the global Covid-19 sell-off and tested a low at 890c/share. Support retained there triggered a recovery and TCP is attempting to return to its previous bull trend – which would be resumed above 2 110c/share (go long). Such a move could see TCP return to its all-time high at 2 680c/share. A new bull phase to new highs would commence above that level – stay long. Refrain from going long if TCP should reverse below 1 865c/ share, as it would mean buyers are few and sellers could drag the share price back to 1 620c/share. Breaching that level could deepen losses further towards 1 400c/share. ■ editorial@finweek.co.za @finweek

finweek

finweekmagazine

Last trade ideas BUY

Tiger Brands 24 September issue

BUY

Massmart 10 September issue

BUY

Sasol 27 August issue

BUY

MTN 13 August issue

Transaction Capital announced in September that it concluded a subscription deal to buy a

49.9% stake in automotive retailer WeBuyCars.co.za for R1.84bn.

finweek 8 October 2020

marketplace killer trade By Moxima Gama

XXXXXXXXXXXXXXXX BLUE LABEL TELECOMS

End to consolidation lue Label Telecoms’ revenue decreased 10% to R21.1bn for the year through 31 May. This excludes gross purchases of electricity, airtime and other prepaid services by customers. The company slashed its debt to R2.3bn from R3.2bn a year earlier after selling assets. Outlook: Blue Label breached the resistance trendline of its long-term bear trend in November 2019 after announcing that it would sell off 85% of its stake in subsidiary Blue Label Mobile for R450m. Despite its ill-fated investment in Cell C, the company’s other divisions have been delivering substantial returns. On the charts: Blue Label’s share price has been trading

BLUE LABEL TELECOMS

52-week range: R1.52 - R3.79 Price/earnings ratio: 7.47 1-year total return: 27.34% Market capitalisation: R3.34bn Earnings per share: R0.49 Dividend yield: Average volume over 30 days: 2 756 056 SOURCE: IRESS

SOURCE: MetaStock Pro (Reuters)

sideways between 377c/ share and 150c/share since November. Within that consolidation, it formed an inverted head-and-shoulders, which is a bullish reversal pattern. Go long: The neckline of the pattern is situated at 335c/ share and the breach of that level confirmed a positive

breakout and may end the bear trend. This move should prompt gains to 520c/share in the short term. But because the three-week relative strength index (3W RSI) is currently overbought, a near-term pullback is on the cards. If it holds above 240c/share, then another buying opportunity could be presented above 335c/share.

Increase long positions above 520c/share if upside should continue, as resistance at 705c/ share (a level dated back to 2013) may well be tested. Go short: Refrain from going long if it reverses below 240c/ share. A false break would be confirmed, and the sideways pattern would extend. Support at 150c could be retested. ■

TFG

Change in sentiment n the 22 weeks ending 29 August, TFG said its sales in Africa (comprising almost two-thirds of total revenue) declined 26.4%, TFG London’s sales were 58.1% lower and their Australian division saw 28.3% lower sales. Total revenue declined by 29.7% in rand terms. Outlook: After trading sideways between 7 665c/share and 4 905c/share for five months, TFG is regaining upside within its bear trend, which implies a positive change in investor sentiment. SA’s Competition Commission conditionally approved TFG’s offer to buy some Jet stores for R480m from Edcon in July. The acquisition of 381 Jet stores will increase TFG’s market share in the whole apparel market to 22% after the acquisition. 16

finweek 8 October 2020

TFG

52-week range: R49.06 - R157.09 Price/earnings ratio: 7.86 1-year total return: -41.05% Market capitalisation: R26.98bn Earnings per share: R10.29 Dividend yield: 3.63% Average volume over 30 days: 2 089 735 SOURCE: IRESS SOURCE: MetaStock Pro (Reuters)

On the charts: With TFG trading above 7 665c/share and the three-month RSI escaping its bear trend, TFG may regain further upside within its current bear trend. Go long: A good buying opportunity would be presented at any level above 7 665c/ share, with potential upside to either the resistance trendline

of the bear trend (blue dashed trendline) or the 10 810c/ share level – thereby closing its previous downward gap (shown on the weekly chart). Breaching the blue dashed trendline could extend gains further to the lower slope of TFG’s bull channel. TFG would resume its bull trend above 15 400c/share. Go short: Refrain from going

long if TFG reverses towards 4 905c/share. Breaching that support level could send the share price to its 2008 low at 2 355c/share. ■ editorial@finweek.co.za Moxima Gama has been rated as one of the top five technical analysts in South Africa. She has been a technical analyst for 12 years, working for BJM, Noah Financial Innovation and for Standard Bank as part of the research team in the Treasury division of CIB.

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ONLY 10 UNITS REMAINING.

Gill Middleton 082 800 1547 gill@lionleadrealestate.co.za www.lionleadrealestate.co.za

CENTURY CITY APARTMENTS PRICED FROM R4M INCL. VAT

marketplace invest DIY By Simon Brown

STRATEGY

The cost of choosing

Photo: Shutterstock

Opportunity costs can weigh on your investment decisions. How stealthy are you? pportunity cost is an economic concept meaning that when you make a choice, you forego an alternative one. There is finite ability, money, and time. For example, you decide on a beach holiday, which means you couldn’t have gone to the mountains. Now sure, the mountains are still there, and you could go next time. But whatever happened at the beach – whether the sun shone, or the rain poured down – was a choice you made with the concomitant benefits or pitfalls. With investing, the opportunity cost is even more acute as we really have finite money and we can’t buy everything. Sure, we could buy both Standard Bank and FirstRand and, if we wanted to, also Absa and Nedbank. But eventually we run out of cash and end up not deciding as we just buy all the banks. As an investor I am always very aware of opportunity cost. The first point I would like to make, refers to when we hold horrid stocks. I have written before that it is a bad idea to hold on to that absolute dog of a stock hoping it recovers. It probably won’t recover. Worse, though, is that while you’re holding that horrible stock and hoping for better days, you’re not holding some other stock that is moving higher and generating a positive return. For an investor, this is the crux of opportunity cost. Are you in the right stocks? The right stock initially embodies all the usual important points. A sector that has great growth prospects built into the industry with a defendable moat that hinders potential competition. An example I often use, is food retailers targeting low-income consumers. All of us must eat, and urbanisation means there are more people in the cities and hence more

finweek 8 October 2020

foot traffic. When bad times hit, people who usually shop at higherend retailers start to shop down. Thus, a great sector with a moat such as food retail on a large scale, becomes incredibly hard to penetrate by starting a new chain of grocers now. It is almost impossible. After having identified the sector, I now want the best stock in the space. I don’t want to own the second-best. I want the best one and then I want it at a great price. Overpaying for a stock hurts future profits and I am happy to wait for the opportunity for a great price to come along. Over the years I have learnt that the wait may be long, but the wait is always rewarded in due time. But here enters another risk: the opportunity cost. What if you’ve done all your homework and got your preferred stock at a great price, and nothing happens to the share price? Sure, a strong dividend will help, but you’re left watching your stock going nowhere while others are running higher. This is your opportunity cost. With large-cap stocks this is usually less of a risk. Ultimately, a quality company will see its price move higher. But in the small- and mid-cap space it is quite a different game. The JSE has several world-class small-cap stocks that have seen little or no price gains over recent years and in many cases prices have fallen. We can hunker down and claim the market is ignorant and one day will come to see what you see. But how long do you wait while the opportunity cost hurts? In a booming market everything runs, but the last few years have taught us that a stock needs buyers. And lots of them. If the market is not agreeing with your assessment, you have to ask the hard question – you may be right, but will you make a profit? ■ editorial@finweek.co.za

What if you’ve done all your homework and got your preferred stock at a great price, and nothing happens to the share price?

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COLLECTIVE

INSIGHT

INSIGHT INTO SA INVESTING FROM LEADING PROFESSIONALS OCTOBER 2020

THE PROPERTY EDITION THE INS AND OUTS OF INVESTING IN THIS ASSET CLASS Inside 20 22 24 26 27 28 29 30 30 31

Introduction All you need to know about real estate The evolution of SA property Real estate investing after lockdown â&#x20AC;&#x201C; Doom and Zoom? Worldwide property investment awaits investors Moral precepts for fund management and the property sector The opportunity cost of buying your first property Housing as a verb From big box to power box to cloud box Household resilience is tied to the house

collective insight By Jonathan Brummer

INTRODUCTION

PLEASE SEND ANY FEEDBACK AND SUGGESTIONS TO CABOTA@ AFORBES.CO.ZA. finweek publishes Collective Insight quarterly on behalf of the South African investment community. The views expressed herein do not necessarily reflect those of the publisher. All rights reserved. No part of this publication may be reproduced or transmitted in any form without prior permission of the publisher.

CONVENOR Anne Cabot-Alletzhauser Head of Alexander Forbes Research Institute

Photo: Shutterstock

EDITORIAL ADVISORY COMMITTEE

Jonathan Brummer Investment Consultant at RisCura Kelly de Kock Chief Operating Officer at Old Mutual Wealth Trust Company Lindelwa Farisani Head of Equity Sales South Africa at UBS Investment Bank Professor Evan Gilbert Associate professor at USB and research analyst at Momentum Investments Delphine Govender Chief Investment Officer at Perpetua Investment Managers Craig Gradidge Executive Director at Gradidge Mahura Investments David Kop Executive Director at the Financial Planning Institute of Southern Africa Monika Kraushaar Senior Consultant at RisCura Deslin Naidoo Founder of NEBULA SI Nerina Visser ETF Strategist and Adviser Muitheri Wahome Financial Services Professional

finweek 8 October 2020

The asset class close to our hearts

Property conjures up many meanings. For many, it’s their most valuable asset.

s the country moves to lockdown property ownership by pension funds is level 1, South Africans seem to be virtually zero now, in contrast to the high heading out and getting on with levels seen in the 1990s. This may change life again. As we rush between substantially in the future as the investment back-to-back virtual meetings, predictions of case for direct property is particularly the “death of the office” abound. Surveys seem attractive for pension fund capital, given its to indicate that most office workers would generally long-term investment horizon. prefer to work from home – though it seems However, many South Africans have no that it’s not necessarily being at our offices retirement savings at all, and a home may be that we are trying to avoid, but rather the most valuable asset they will ever getting to and from them. own. This is especially true for those One sector that has who were fortunate enough to benefitted from lockdown receive a subsidised house as part measures is online shopping of the SA government’s national and related fulfilment housing programme. An asset activities – Amazon is in talks such as a home could provide to convert failed department valuable support to low-income store space into last-mile households during the current distribution hubs. crisis, improving their resilience and Surprisingly, it is still highly broadening their options. profitable in SA to distribute many Of particular concern is that, in many items through physical locations, even when cases, this value is inaccessible because compared with online retail. Another area within actual ownership isn’t clear. In lower-income the property sector that is receiving significant neighbourhoods across SA, the ‘owner’ of a investment is the establishment of physical property does not match the person officially data centre infrastructure. This will allow for the listed as the owner on the title deed. The growth of a cloud-based economy – yet access Peruvian economist Hernando de Soto called to high-speed fibre internet is this “dead capital”. If someone can’t It’s a visceral and deeply currently limited to less than 25% prove they own something – how emotional asset class and, of South Africans. The reality is can they use it as collateral to start as such, the close to that living in a “virtual-only” world a business, for example? is still a long way off. Property reflects how we live In fact, a different reality faces our lives. Where we work, play, most South Africans, which was pray and sleep. In an increasingly brought into stark contrast by virtual world, property anchors us decline in listed property lockdown. The decree to “stay to our physical reality. We can see it, value during 2020 has been hard to bear for at home and away from others” touch it, understand it. It conveys most investors. has a quite different meaning belonging, identity and status. It’s a to those who have no home to visceral and deeply emotional asset go to or live in densely populated areas with class and, as such, the close to 50% decline in poor infrastructure. Locating a data centre listed property value during 2020 has been in a previously marginalised community hard to bear for most investors. and adding complementary features, such In this quarter’s issue, the authors explore all as power generation and sports facilities, these issues and more. Perhaps the world and changes it from a big, ugly industrial box into a outlook for property has changed structurally, multifunctional community asset. permanently. Or perhaps, once we have an Funding these projects will require effective Covid-19 vaccine widely available, significant capital that will likely be accessed everything goes back to the way it was. ■ through listed and unlisted markets. Direct Jonathan Brummer is an investment consultant at RisCura.

50%

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AF20218

Uncertain times call for a steady partner We can’t eliminate risks from market shocks but we can manage them. As we weather the Covid-19 storm together, Alexander Forbes is helping you and your members navigate uncharted territory: ■ Our strong focus on risk management strikes the right balance in taking advantage of growth opportunities while protecting against market downturns. ■ Our advice helps your members make better decisions about their retirement fund savings, including loss of earnings or retrenchment. ■ Our integrated consulting is based on outcomes, best advice and holistic needs. We’ve heightened our operational excellence now and into the future.

You can count on us, through the good times and the bad.

Staying the course – together

Alexander Forbes Financial Services (Pty) Ltd is a licensed financial services provider (FSP 1177 and registration number 1969/018487/07).

collective insight By Anne Cabot-Alletzhauser

PROPERTY 101

All you need to know about real estate

Everything you wanted to know about investing in property but didn’t want to ask at the risk of sounding stupid. here’s something about investing in property that seems to pull at our heartstrings: property, housing and home. There are myriad dimensions of property investments that can confound even the most seasoned asset manager. To begin with, investors would be right to be confused about what kind of asset it actually is. Is it equitylike? Or bond-like? Is it a diversifier or highly correlated to some other asset class? Is it liquid or illiquid, volatile or stable? Does it require high

or low maintenance as an investment? The answer is: it depends. There’s a property-related investment for every permutation identified above. So, let’s get a bit more insight into the basics here, and hopefully introduce you to some aspects about investing in property, housing or homes that you may not have considered. Just note: this Property 101 discussion will not be about how to buy your own home – but rather focus on property as an investment.

Tuning yourself in on property assets First some words of wisdom from Dr Riëtte Carstens, a senior expenses. This leaves a net rental that is used to service debt lecturer in real estate investment and finance at Stellenbosch obligations. It sounds simple. However, when rentals come under University: Real estate investments differ from other asset classes pressure, vacancies increase, and operating expenses are higher than and require a unique perspective. anticipated; the net rental may become insufficient to service Firstly, real estate investment necessitates a long-term the debt, especially in highly-leveraged situations. approach, irrespective of the nature of the investment. Lastly, the economic environment affects the Direct real estate investors and real estate investment demand for space. As Fran Troskie from RisCura points trusts (Reits) commit to long-term fixed property out: “Property is a useful and a necessary diversifier investments that are in most cases financed with longin investment portfolios, particularly in pension fund term debt. The property market has been known for its portfolios. Over the long run, property investments can cyclical nature affecting returns over the short term. provide a steady source of income and act as a useful Dr Riëtte Carstens Secondly, real estate returns consist of two parts: income; Senior hedge against inflation.” As inflation increases and lecturer in real estate and a change in value over time. investment and finance at interest rates remain low, yields on asset classes, such Stellenbosch University Many market commentators say it gives the asset as nominal bonds, may look decidedly less attractive, both a bond-like and equity-like quality and introduces an Troskie says. This is where listed and unlisted property inflation-hedging dynamic to the investor. The objective is to receive should be able to provide investors with better income, though not a good rental income, minimise vacancies and manage operating always better returns, according to her.

Direct investing in property He says investors should be asking themselves important The most common option for the average person who wants to questions such as: “Should the tenant vacate, will I be able to re-let invest in a physical property for income purposes is to become a the building easily?”; “Am I able to tolerate a period of vacancy buy-to-let investor. in-between letting?” The benefits of this approach are summarised above by There are some pitfalls with direct investment. “Physical Stellenbosch University’s Carstens. properties are likely to require periodic and sometimes With direct real estate investment, the investor unexpectedly expensive repairs – risks investors often do has control over aspects such as the rental rate, the not fully account for,” says Mowlana. “Compliance with rental agreements and improvements to the property. health and safety protocols, especially air conditioning This means they can influence net rental income. The and fire compliance in commercial buildings, can render investor can fund the investment using a mortgage with older buildings less valuable than the rents suggest, and an a relatively small proportion of personal equity, depending Yusuf Mowlana on the terms of the approved finance, she says. “What Analyst at Prudential apartment block in a sectional-titled complex may have a Investment Managers significant unbudgeted or unfunded liability.” they can’t control, though, is the change in the property More importantly, overseeing the day-to-day operations value over the investment period.” of a property may require time the investor doesn’t have, or oversight Yusuf Mowlana from Prudential Investment Managers adds that costs that eat into the return potential. “a concentrated exposure in a single, directly-owned building may Finally, if the investor wants to sell, it will take time to market the involve more risk, but that is not always the case, provided that the risk property and to complete the sale. of obsolescence in the building is adequately considered”.

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collective insight Real estate investments differ from other asset classes and require a unique perspective. Firstly, it necessitates a long-term approach, irrespective of the nature of the investment.

Photos: Supplied I Shutterstock

What about the Reits?

Most listed property companies in SA are Reits. There are several benefits to investing in these companies. “Reits present investors with a less capital-intensive opportunity to indirectly invest in large commercial properties that may be unattainable Ané Craig for the individual,” says Stellenbosch Credit analyst at PSG University’s Carstens. Asset Management Reits enjoy a tax-privileged status that unlisted property companies do not, says Prudential’s Mowlana. (One may need to consider your own tax situation, and which is the most efficient ownership structure for you.) “They also invest in a broad range of property types and geographic regions. From an income perspective, Reits can secure corporate tenants and sign longer leases, with increasing rentals ensuring an increasing rental income over time. Returns comprise of an income component from distributions and a capital component from the change in the share price over time.” Most importantly, Reit investments are considered more liquid and incur lower transaction costs relative to direct real estate investments, Mowlana says. There are also some pitfalls. Dirk Jooste and Ané Craig, at PSG Asset Management, say that the management of SA Reits has raised some concerns in the past. Legislation holds that 75% of distributable income must be paid out and limits tax-deductible expenditure to maintenance only. Capital expenditure (aimed at improvements) cannot be deducted for tax purposes, and since any retained distributable income is also taxable, this limits the organic funding options available to Reits for expansionary purposes.

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It’s all about the debt The total market for listed property debt is more than R40bn, says Mizamo Mjekula, credit analyst at Prescient Investment Management. As a percentage of their total debt, listed debt has increased by almost 60% over the last five years. This shows a shift in reliance on funding from the banks to funding from the market. Mizamo Mjekula When listed property companies issue debt Credit analyst at Prescient under their listed note programmes, the issued Investment Management bonds will have certain debt covenants in place. These are rules or limits that, if breached, have a negative impact on the debt in issue. These are in place to provide investors with the comfort of knowing that the risk taken is managed and the counterparties are being prudent in the way they are managing their debt. Firstly, the loan-to-value (LTV) ratio looks at the percentage of debt a company has relative to the value of its properties. The higher the percentage, the riskier the company. Looking at the current LTVs in the SA listed property space, companies generally have limited headroom in this covenant, which will place pressure on these companies’ balance sheets and dampen their ability to fund in the future. The second debt covenant is the interest cover ratio (ICR). This looks at the ability of a listed property company to pay the interest on its debt. ICR is used to interpret the number of times earnings covers the interest expense. The listed property sector’s average ICR is currently around 3.6 times, while the average ICR covenant is two times, according to Investec – but there is still headroom here.

Here or there?

Investors in listed property can choose between a domestic or an international company. However, no matter which way you choose, you still end up with a relatively high international exposure. In fact, according to Nicolas Lyle, senior analyst for Reits and listed property funds at STANLIB, at Nicolas Lyle Senior analyst for Reits the end of June, approximately half of SA Reits’ and listed property assets were invested offshore to take advantage of funds at STANLIB more favourable underlying economic conditions, prospects and currencies. One of the factors influencing this outcome has to do with the limited quantum of SA institutional-grade real estate stock available. The SA Property Owners Association estimates that SA Reits own an estimated 23% of all institutional-grade real estate in SA, which is high relative to global Reits (with the exception of Singapore). This concentrated ownership structure effectively results in SA Reits having to diversify exposure to include global assets. ■ Anne Cabot-Alletzhauser is head of the Alexander Forbes Research Institute.

finweek 8 October 2020

collective insight By Peter Clark

HISTORY

The evolution of SA property The three pieces that follow provide context to the change and innovation in the property sector over three decades. Peter Clark traces the shift in institutional portfolio allocations and why investors need to reassess them. Ryan Eichstadt looks at the transformative impact of legislation regarding real estate investment trusts (Reits) as a catalyst for growth in the listed real estate sector. Finally, Michael Arbuthnot reminds us that the way we use, and value, real estate is dynamic and active managers who can spot the transitions through different market cycles will be the winners.

Have we come full circle?

There is a solid investment case for a shift back to directly owning real estate.

n the 1990s, the South African property market was largely directly owned and managed by insurance companies and pension funds, while the listed market was in its infancy at the time. But over the last 25 years, the listed market has ballooned from owning R1.5bn of SA property assets in 1995, to R320bn now. The sector transformed from simple businesses owning SA property to complex global structures, resulting in many property portfolios becoming unfocused. In addition, governance issues and high debt levels have been material headwinds in recent times. These factors, together with elevated levels of volatility for listed property, have sparked renewed interest in direct property as an asset class.

Allocation trends

Having exited direct property more than a decade ago, SA retirement funds now find themselves largely with no direct property exposure (excluding the Public Investment Corporation). Calculating the SA market portfolio reveals that investable direct real estate represents 5.3% and listed real estate accounts for 5.4% (December 2019). The pension fund industry has largely neglected the asset class with an allocation at virtually zero. This is in stark contrast to the market portfolio – and even more so when

compared with global pension funds that on average have 9.3% exposure to real estate – largely through unlisted funds (see graph). Developed market pension funds have consistently been increasing their real estate allocations, which are expected to rise above 10% in the coming year. SA retirement funds have lacked the scale and specialised expertise to individually tap into direct real estate opportunities. In addition, efficient structures have not existed to pool investor capital to access portfolios of assets. This is, however, changing as investment managers are coming up with tax-efficient solutions that provide exposure to high-quality assets diversified across sectors with conservative leverage. The market is expected to open further when legislation regarding real estate investment trusts is extended to unlisted property companies.

Investment case

The investment case for direct property is particularly attractive for pension fund capital, given its generally long-term investment horizon. Key factors include attractive returns, inflation hedging, a strong income underpin, low volatility, diversification and better overall risk-adjusted returns. Importantly, the risk-return profile is wellsuited to asset liability management of pension fund markets. ■ Peter Clark is a portfolio manager at Ninety One.

SA PENSION FUND MARKET UNDER-ALLOCATED TO DIRECT REAL ESTATE SOUTH AFRICAN PENSION FUND ALLOCATION TO REAL ESTATE

12 5.3

4.4

9.5

10.3

8 % of AUM

2 0.0

0 Listed real estate

Direct real estate

■ Current allocation ■ Market portfolio

finweek 8 October 2020

80 Proportion of pension funds investing in real estate

5.4

PENSION FUND INVESTING IN REAL ESTATE ROUTE TO MARKET

100

% 6 5

AVERAGE DEVELOPED MARKET PENSION FUND ALLOCATION TO REAL ESTATE

82%

60 40

30%

31%

20 0

Current allocation

Target allocation

Unlisted funds

Direct

Listed funds SOURCE: Bloomberg and Ninety One

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collective insight

THE EVOLUTION OF THE SA PROPERTY MARKET 2000 18 property stocks with R33bn market cap and R40bn of SA assets.

2008 Listed real estate market starts expansion overseas.

1995 Seven listed property companies. R1.3bn market cap and R1.5bn of assets. Majority of commercial real estate held by insurance companies and pension funds.

2010 15 property stocks with R140bn market cap and R140bn of SA assets.

2011 Pension Fund regulations (Regulation 28) forces pension funds to reduce real estate exposure.

2013 Introduction of Reit legislation sees boom in listings and movement of direct assets to listed market. 2018 50% of SA listed property market offshore.

2019 Pension funds hold almost no direct real estate exposure (excluding PIC). Size of insurance companies’ property portfolios significantly reduced.

2015 39 property stocks with R671bn market cap. 2020 44 property stocks with R320bn market cap and R320bn of SA assets.

>2020 Expect market to trend back to greater proportion of property assets held directly or in unlisted funds in line with international norms.

Innovation that spurs growth

The changing use of real estate

By Ryan Eichstadt

By Michael Arbuthnot

The law changes that triggered a sector.

Photos: Shutterstock I Supplied

SOURCE: Bloomberg and Ninety One

Property defines us all.

In 2013, new legislation was introduced allowing for the creation of a new listed property investment structure, a real estate investment trust (Reit), thereby replacing property unit trusts (PUTs) and property loan stocks (PLSs). The Reit structure aligned the South African listed property sector to international standards, creating a globally comparable asset class. Equally important, Reits provide a tax-efficient scheme that is attractive to shareholders. At its peak, around three years ago, following a two-decade bull market, the SA listed property sector had a market capitalisation of around R600bn compared with about R100bn in 2006, representing a compound annual growth rate of close to 17.5%. Listed real estate has always been perceived as a liquid, stable investment with a predictable, growing income stream, coupled with potential capital growth. The predictable rental income growth achieved by SA Reits has been underpinned by above-inflation in-force rental escalations, low vacancy rates and controlled property expenses growth. Regulations require Reits to pay out at least 75% of their distributable income. However, most management teams were incentivised to retain minimal amounts of distributable income. Furthermore, in terms of tax benefits, KPI-linked remuneration and high-yielding returns for shareholders have led to them historically opting to pay out 100% of distributable earnings to shareholders. The Covid-19 pandemic, coupled with the weak local macroeconomic environment, has revealed the vulnerabilities of Reits, where the trade-off between the retention of capital and shorter-term shareholder return expectations has manifested itself in high gearing levels and vulnerable balance sheets, exacerbated by further potential declining property valuations. Investors can’t invest in a more liquid asset class with both sector and geographic diversification. The sector comprises of several sub-sectors, including retail, office, manufacturing, logistics, storage, hospitality, and healthcare. Furthermore, offshore earnings now contribute around 50% of total sector earnings compared to 7% in 2010. ■

Amazon is in talks with Simon Property Group, the largest retail mall owner in the world, on potentially converting failed department store space into last-mile distribution hubs. Lord & Taylor’s flagship department store in Manhattan will soon house office workers for Amazon, and a tourist destination in the heart of Hollywood is getting a $100m facelift that includes converting underused retail spaces into offices. Globally, a desire for additional space, flexible working, and record-low mortgage rates are causing families to purchase or rent homes further away from cities. An ageing millennial cohort and lower taxes outside of the dense urban areas are further reasons for the flight to the suburbs. These factors are creating headwinds for high-cost urban apartment owners, which is in stark contrast to single-family rental companies that are the net beneficiaries; a trend that is reflected in the pricing of real estate investment trusts (Reits). Real estate is a proxy for how we live our lives. Covid-19 and the subsequent lockdowns have only exacerbated the transition from certain property-use types to others. The most obvious example being the transition to online shopping and working from home. This transition is negative for the mall and office landlords, but positive if you own the industrial space where online goods need to be warehoused and delivered from. Or, if you own the data centres and towers needing to keep up with the additional demand from online traffic. Property will always be connected to how we work, eat, play, study and sleep – only in an ever-evolving way. In a rapidly changing environment where property use is evolving, investors now more than ever need good-quality active managers in the listed real estate space. ■

Ryan Eichstadt is head of research at Meago Asset Managers.

Michael Arbuthnot is CEO of Catalyst Fund Managers.

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collective insight By Vincent Anthonyrajah

INVESTMENT

Real estate investing after lockdown – Doom and Zoom?

For certain categories of products, brick-and-mortar outlets still make sense.

PRIME RETAIL RENTALS R/m2

Sandton (line stores)

Prague

Moscow

Singapore

Amsterdam

Barcelona

Dublin

Athens

Beijing

Munich

Seoul

Vienna

Zurich

Tokyo

Sydney

Paris

Milan

London

New York

40 000 35 000 30 000 25 000 20 000 15 000 10 000 5 000 Hong Kong

t is reasonable to think that the future of real estate investments is doomed. The massive growth in Zoom’s (the videoconferencing supplier) revenue at its last set of results would be cause for concern for investors in real estate investment trusts (Reits) when thinking of office exposure. Furthermore, the collapse in the UK of retail-focused Reits, such as Hammerson and Intu, gives investors good reason to fear that online retail is finally delivering the hammer blow to the sector. In the case of South Africa, the market perception is that the migration to online retail will present a huge risk for retail landlords. It may not be obvious – but for many malls in SA, the economics still favour bricks-and-mortar relative to online channels. There are still material risks; however, in our opinion, valuations for certain Reits present an attractive investment case.

SOURCE: Differential Capital research, Savills, Cushman & Wakefield, JLL Research (2019 data) *Data relates to high-street rental prices

Cheap SA retail rentals

Over the past 15 years, several retail operations in SA have been moving online, with books, music, travel and even films being sectors that have adopted digital distribution. The reasons for these are economic. The products themselves have been digitised and therefore it made little sense to pay rent to distribute products that were completely digital. The economics of moving other retail operations to online channels are more nuanced where the products are physical (such as clothing, food and even technology hardware). Recall that the price of an iPhone or a branded T-shirt is roughly the same across the globe. However, the costs of real estate are not. For example, it is far more expensive for premium space in London and New York than it is for premium space in Sandton. Therefore, it is still highly profitable in SA to distribute most physical items when compared to online retail. Many consumers would prefer online distribution given the convenience; however, the elasticity of demand is not great across all product lines. We can see that consumers are not necessarily willing to pay much more for this convenience. Differential Capital learned this first-hand when we led a consortium that made an offer for Jet from the Edcon Group. In the value retail segments, consumers are price-sensitive and, in many areas, physical stores are far more profitable than an online service. Highly-skilled IT developers are expensive and, together with the complex logistics operations, this creates barriers to creating successful online offerings in SA. Therefore, our low rental costs compared to many global cities, low store labour costs and low elasticity of demand for many items, mean that there is still an underpin for rental demand in SA,

compared with retail malls in countries such as the UK. We can see that in many parts of the world people are resuming normal activity. In fact, in countries like Germany and France, foot traffic in malls is starting to materially exceed levels from before Covid-19 as people venture outdoors again. From our proprietary data sources, we see strong indications of recovery in SA too. Therefore, we are not so bearish on the SA retail real estate sector over the medium to longer term, specifically in the case of Reits with healthy balance sheets and liquidity. Oversupply in certain nodes could lead to some malls permanently closing, however, this is likely to leave survivors in good shape.

Our approach

We invest in listed global real estate opportunities that are wellpositioned for potential permanent changes in economic behaviour. In our view this would be residential, logistics, data centres and convenience retail in select countries. We would prefer directly investing in specialised offshore management teams than supporting SA Reit management teams that cannot compete with local knowledge in these markets. We prefer SA Reits where management teams have minimal offshore exposure and healthy balance sheets and access to liquidity. We also prefer companies that are actively looking to reduce offshore exposure to make their balance sheets stronger while optimising local portfolios. In SA we think Reits with retail, logistics and residential exposure provide good reward profiles relative to the risk. However, the SA Reit sector still lags in corporate governance and our view is that an activist approach is required to ensure alignment. ■

In the value retail segments, consumers are price-sensitive and, in many areas, physical stores are far more profitable than an online service.

finweek 8 October 2020

Vincent Anthonyrajah is the managing director of Differential Capital.

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collective insight By Naeem Tilly and Anil Ramjee

OFFSHORE

Worldwide property investment awaits investors

Global Reits offer more geographic and specialised sector opportunities to discerning investors. he South African listed property sector supported by government grants, family declined by 47.3% this year. At its trough, allowances and growth in commodity prices. it was down 56%. Over three years, Financial leverage has increased over the the sector shed an annualised 23.8%, past few years as real estate investment trusts underperforming bonds, cash and equities. (Reits) internationalised their assets. Despite Listed property has been in decline since 2018. this, there is headroom for most companies In that year, allegations of wrongdoing against to absorb a drop in earnings and asset values some companies brought to light corporate to avoid breaching covenant levels. governance and capital structure issues. The risk for outliers is undoubtedly Despite clearance from authorities, the sector elevated, but banks are likely failed to attract interest as concerns around to be accommodating as the fundamentals took centre stage. alternative – to repossess Even before Covid-19, SA was in a recession, assets for management or fuelled partly by inconsistent electricity disposal – is less attractive. generation. Despite high unemployment, rapid Furthermore, Reits can service acceleration in municipal costs and shrinking debt from operating profit and disposable income, developers pushed supply withhold a quarter of earnings higher and rentals continued to escalate by (before tax) to repair balance sheets more than inflation. Covid-19 exemplified without relinquishing their Reit status. much of the pressures facing the sector. While Income seekers can take comfort that many the economic damage from the lockdown will companies, such as Equites and Sirius, intend be felt in all sectors, SA property has a greater to continue paying dividends through the exposure to retailers. Non-essential retailers, current cycle. restaurants, and entertainment have been hit Local valuations are appealing, with hardest and have struggled to recover even as the discount to net asset value of 45%. restrictions eased. Valuations are inherently historical in nature, Yet, there are encouraging signs of but current pricing implies a 27% write-down, progress. President Cyril Ramaphosa’s recent well above most forecasts. victory in the ANC and over corruption could While the macroeconomic environment encourage much-needed is distressed, local property has Local valuations are structural reforms. suffered more than fundamentals appealing, with the discount On the ground, rental justify. There is a negativity bias to net asset value of collection rates have been gripping sentiment – investors better than expected at 68% are dwelling on bad news rather of “normal billings” in April and than embracing the possibility of May, and while June numbers a positive outlook. This disconnect are incomplete, some data points between long-term fundamentals to a recovery to over 75%. Anecdotal evidence and valuations has created opportunities. suggests the trend has continued to improve Many of the risks facing the domestic into July and August. market are unique to SA. This is where global In contrast to retail, the self-storage, office property, an often overlooked asset class, and logistics sectors have had relatively comes in. The case for investing in global strong collections. Shopping centre footfall bonds and equities is deep-rooted, but most has recovered to approximately 80% of last investors tend to see international property year’s levels and are consistently increasing as allocation as a part of bonds or equities. infection rates slow and restrictions ease. With Investing in a broader range of markets urban shopping centres showing the most risk enhances diversification beyond just given the growth of e-commerce, stretched geographies but into sectors too. In SA, the historical valuations and an oversupply; rural opportunity set rests in the retail, office, and and non-urban markets are performing well, industrial sectors.

Photos: Shutterstock

45%.

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In comparison, the global property benchmark consists of companies across eight regions (US, Canada, UK, Europe, Australia, Hong Kong, Japan, Singapore) and 16 different sectors, with about 92% being specialised counters. Investing only in SA limits one to 0.8% of the global market. It is in this degree of diversification and specialisation that one can navigate the current slowdown in global growth while taking advantage of themes such as e-commerce or work from home. Expanding the investable universe typically improves the riskreturn characteristics. Global property has delivered three-, five- and ten-year annualised returns of 10%, 9.4% and 16.9% in rand, respectively. The sector has exhibited low correlation coefficients with traditional asset classes, as well as domestic property. Property is often viewed as a hybrid asset class. Like bonds, the investment horizon is long, and income is stable, while income can grow over time like equities. Global property is yielding 4.3%, 3.85 percentage points more than bonds. The average dividend pay-out ratio for global Reits is 73% compared with SA at 100% historically. Following the global financial crisis in 2008 and 2009, international companies have generally been risk-averse when dealing with leverage. Today, balance sheets are safer (with a loan-to-value ratio of 35%) and Reits retain access to capital at attractive terms. Local and global markets are likely to remain volatile as sentiment alternates between optimism and pessimism, triggered by Covid-19 trends and expectations for economic growth. Government stimuli should have positive implications, but a return to more normalised levels of consumer activity is imperative. Whether this takes place after further lockdowns, a vaccine or people adapting to a new norm remains to be seen. If one can view the market with a long-term horizon, the sharp decline in prices offers a rare opportunity. ■ Naeem Tilly is head of research at Sesfikile Capital. Anil Ramjee is a global Reit analyst at Sesfikile Capital.

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collective insight By Donald Molema

RETIREMENT FUNDS

Moral precepts for fund management and the property sector

Breaking out of old-order prescripts for pension funds is imperative if we want to change its real-asset landscape. onofo Kgoroeadira is a newly-qualified actuary fund; explore the case for increased allocation to property; who was recently re-enthused into the and review the manager structure for impact investing and investment industry by a chance encounter with the role of emerging BEE managers. her high school friend, Ludwig Magadla. She Her report back is terse and austere. Firstly, Covid-19 is had always thought her friend was “awfully smart”, but “too having a greater impact on fund investment returns and edgy” and “reading too much into things”. The two had an funding levels than on mortality and sickness rates. Her opportunity to touch base at the funeral of Ludwig’s uncle in modelling points towards at least three more years of distress Alexandra township, a former PAC APLA military wing general and consequently subdued returns of listed stocks. who had succumbed to Covid-19-related illness. There are On property asset allocation she notes separate prefew better opportunities for re-anchoring such as the and post-Covid-19 themes. The pre-Covid-19 property Over the long term, death of a loved one under the circumstances such as theme was characterised by artificially high allocations a rationalised manager in Alexandra: the hypocrisy of social distancing in an to listed property and the use of a slew of private equity structure stands to improve urban concentration camp; the evidence of the erosion managers. It is now proving to be a severe drag on funding levels by up to of fiscal governance by the ruling party, its subversion to investment performance, and the medium-term outlook self-enrichment and the preeminence of oiling of party remains hazy. The post-Covid-19 property investment machinery. A 21 “One Settler One Bullet” gun salute was geography needs to capture new emerging themes delivered in a community that is set to endure a 50% to in the reshoring of supply and development chains in 60% unemployment rate among young people. mining beneficiation, e-commerce transport logistics particularly when combined with stable higher real returns The two lifetime mates had an opportunity for and information and communication technology- (ICT) that should accrue from posta chat around industry moral precepts and the based healthcare. In addition, the integration of smart Covid-19 real assets. management of property investments by retirement technologies in the property sector should also reduce the funds. “There are crises within the crisis,” reckoned risks of stranded assets, increase social wages and reduce Ludwig, “of moral inversions to constrain fiduciary duty living costs. Government subsidisation of education and to retain old-order stratifications and, more recently, social housing in terms of the allocation of land and their subversion for a sub-goal political pursuit. development rights will provide a buffer, making the Pension funds underinvest in the real economy investment case for inclusive stable growth clear. – social infrastructure for one. This compounds The mobilisation of the fund’s assets financial market concentration risks, effectively behind these strategies will require significant constituting a charge on member funding rationalisation of the current fund management levels, especially in times of crisis.” He notes structure. It will require a combination of insourcing an earlier research paper that illustrates the of mandates and their combination with dedicated required rate of return for infrastructure assets investment capacity in real assets in the property tend to be too high – 20% per year in some sector. The fund cannot continue to support more instances. “The developmental stability that would than 15 investment managers – whatever their result from these types of investments would provide BEE profile. Over the long term, a rationalised manager a proper match of assets with the funds’ liabilities structure stands to improve funding levels by up to 25%, – something that is ignored in the unrelenting focus on particularly when combined with stable higher real returns that financial rates of return,” he concludes. should accrue from post-Covid-19 real assets. The foregoing illustration is not entirely metaphorical. Investor policies and strategies that pursue stable funding Quantify Covid-19 risk and alternative scenarios levels and continued employment for its members can, and Nonofo finds these series of conjectures cathartic, but should, find post-Covid-19 opportunities of value creation in hard to action. She had just been called in by a multiproperty themes that meet their fiduciary duties. The history employer industry fund for a review of the fund’s investment and evolution of locations such as Singapore and California policy and its post-Covid-19 investment strategy. The illustrate the potential for the mainstream economy and fund’s investment committee does not want to preside finance supporting each other – there is no reason why over both job losses and low retirement benefits – a dual this can’t happen in South Africa. In fact, it has to and impoverishment of its members. It is also concerned about retirement funds can play a decisive role in achieving this the growing risk of social unrest impacting on its sponsoring outcome and have a responsibility to do so. ■ employers. The request for an urgent review report is required on the following topics: quantify the cost of Covid-19 on the Donald Molema is an independent actuarial and investment consultant.

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25%,

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collective insight By James Robinson

NEW BUYER

The opportunity cost of buying your first property

It is true that for most people, rent is one of the biggest monthly expenses. Should that money rather be used to purchase property instead of ‘paying someone else’s bond’? he choice between buying or renting a place to live is an important one – especially to those planning on moving into their first abode. Let’s look at an example of two young professional couples who are considering the option of buying their first property. Assuming these couples work in one of the cities around the country, they are likely to want to live in the bustle of Green Point in Cape Town, Umhlanga Rocks in Durban, Bryanston in Johannesburg or Summerstrand in Port Elizabeth. Now, each of these places can cater to the elites, but the average no-frills rental price of approximately R13 000 per month for a twobedroom apartment is possible. An example of property prices in these areas would differ quite dramatically per square metre, but for this example we will take a very conservative approach of R2.2m for a two-bedroom property in a favoured postal code. Couple A has decided to buy a property for R2.2m in Cape Town as they figure they would like to own rather than rent. After negotiating a preferred interest rate with the bank on a 100% mortgage for prime minus 0.25 percentage points (6.75% per year as of August 2020), they are looking at a 20-year bond with monthly repayments of R16 842 – after paying bond registration and transfer duties of approximately R143 366. The couple is then subject to monthly rates, levies and municipal taxes to a conservative amount of R2 500. On top of these expenses are the living costs as per any normal household budget and unplanned expenses of owning a property. In summary, there is an initial cost of R143 366 (bond, utilities and transfer costs) and a monthly cost of R19 342 before groceries, entertainment and other expenses. The repayment of R16 842 per month will be servicing bank fees, interest and the capital repayment towards the property. The first payment pays R12 408 towards the interest on the loan – which demonstrates that although the couple will own the property after 20 years, over R1.8m of interest payments will be made to the bank over this period – which equates to 45% of the total payment. On the other hand, Couple B looked around and decided they were not committed to buying and would rather rent a property. They found a suitable place for them at R13 000 per month which

included water, rates and taxes. They were asked to pay a deposit of R26 000 which was refundable with interest, granted they did not damage the rental property. Compared with Couple A (who bought the property), Couple B will have R76 104 more in disposable income per year (R6 342 per month) on top of the initial amount of R143 366. Remember that the deposit is held on investment and is refundable to Couple B. This could be invested into creating additional income or capital growth towards future ambitions or even to buy a property with a large deposit. The opportunity cost of buying your first property is therefore R219 470 in the first year and an extra R76 104 per year thereafter. However, Couple B will have no asset at the end of 20 years and will have to manage a secondary savings programme. From a pure investment perspective, even if the couple invested all the additional cash flow thereafter, that investment would need to yield at least a 4.5% real return (after costs) each year for the entire 20-year cycle, which is improbable. Couple B, who choose to rent, gains greater flexibility to use their capital, allowing them to invest in either their own future, whether it be in themselves (further education, travel, an entrepreneurial desire or even a down payment on a house at a later stage) or in growth or income-yielding assets for long-term returns. Couple B can also live comfortably, knowing that they will not have any unforeseen expenses due to leaking pipes, burst geysers, maintenance and repairs or security upgrades – all of which will be at the expense of their landlord. However, Couple A, who despite losing flexibility over the short term and may incur unexpected costs, should have an asset at the end of the repayment period that can be sold or converted to rental income. Neither Couple A nor Couple B are wrong in their approach. There is a potential opportunity cost to purchasing a home, which can be put down to a rand amount, but there is a sense of security and undeniable accomplishment in purchasing a property and taking ownership of a home. For some this is potentially more important than having extra cash flow at the end of the month. Either way, it is best to consult with a certified financial planner before you make such a life-changing decision. (The hypothetical figures in this article were taken from FNB’s online mortgage calculator.) ■

Photo: Shutterstock

There is a potential opportunity cost to purchasing a home, which can be put down to a rand amount, but there is a sense of security and undeniable accomplishment in purchasing a property.

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James Robinson is an investment analyst at Alexander Forbes Private Client Wealth.

finweek 8 October 2020

collective insight

NEW LENS

Heather Dodd

Housing as a verb How we can build resilient cities. By Heather Dodd

From big box to power box to cloud box

Rethinking data centres in our communities.

The word housing is both a noun and a verb. When we use housing as a verb, we start to consider the implications of the impact of housing as a force for change, not only in people’s lives, but in the city itself. Covid-19 has laid bare the divided apartheid city. The government-imposed lockdown was a vastly different experience for those in crowded inner-city rooms and dense informal settlements. If you didn’t understand the term structural inequality and its impact, then recent events should have made this clear. Apartheid city refers to the 30-40-40 conundrum, where a 30m2 house is located 40km from job opportunities with a commute of more than 40 minutes. We know this is not viable. We need to change our view of housing as an object – a noun – to housing as a verb, considering housing not only as a financial asset but as a social asset for a future South Africa. Locational-based investment in supportive infrastructure is the key to enabling neighbourhoods. This means the provision of affordable housing in all neighbourhoods as well as developments in underserviced areas. Placemaking in tandem with the concept of ‘home’ should be our goal. Savage + Dodd Architects have been engaged in innercity social housing and housing-adaptive re-use for the past 20 years. In doing so we have viewed our insertions into the city as building neighbourhoods – contributing to the ongoing challenge of urban regeneration and to the life of the city. This has contributed to the wholesale changes in the city from a mono-functional work environment to a predominantly residential environment. One of our largest inner-city social housing precincts in Johannesburg is the Brickfields Precinct, owned and managed by the Johannesburg Housing Company. The impact of this can now be viewed with the hindsight of 15 years. A stable residential community has emerged. We can now view the impact of this investment, not only in people’s lives and livelihoods, but in urban terms. We need many more of these neighbourhoods. ■

Teraco recently confirmed the construction of a new data centre facility in Cape Town while Amazon announced it would be hiring 3 000 new employees in South Africa. Investments in physical data centre infrastructure will allow for the growth of a cloud-based economy but currently access to high-speed fibre internet is limited to less than 25% of South Africans. With property, location matters. Where developments are located impacts on physical and socio-economic contexts. “The cloud”, though, is not tethered to a physical location. That gives us an opportunity to think more strategically about where we locate it. What if we moved our concept of data centre from big box to power box? Then added some complementary features that translated a big, ugly industrial box into a multifunctional community asset? What if we located a data centre in a developing environment, such as Khayelitsha in the Cape or in Tembisa rather than in Midrand? Firstly, we would move towards spatial redress through strategic investments in otherwise marginalised communities. Secondly, we would start to address the concept of building in a circular economy. By locating a data centre in a residential environment, we can introduce several out-of-the box solutions: ■ From big box to ‘power box’: the data centre as a ‘power centre’ – harnessing waste energy generated from the servers to heat water for the community. ■ From big box to ‘play box’: utilising the rooftop as a community sports centre. ■ From big box to ‘cloud box’: addressing the digital divide by offering free wi-fi to the community. The ‘cloud box’ enables access to schooling, shopping and so forth. Perhaps the box then becomes a central collection point for e-commerce deliveries. What if these ‘power-ful’ boxes proliferated throughout our towns and cities as recognisable branded assets demonstrating true partnerships between businesses and communities? ■

Heather Dodd is a director at Savage + Dodd Architects.

finweek 8 October 2020

By Heather Dodd

www.fin24.com/finweek

collective insight By Illana Melzer and Kecia Rust

NEW LENS

Household resilience is tied to the house

Photos: Shutterstock | Heather Dodd

The key success of the national housing programme is undermined by the title deeds backlog. ince 1994, the South African government’s national housing programme has completed an estimated 3.4m housing units and handed these over to the lowest-income families in the nation. An estimated 2m of these houses are formally registered on the deeds registry, and subsidy housing stock now accounts for just under one-third of all formally registered residential properties in SA. For the households who were fortunate enough to receive a subsidised house, it is probably the most valuable asset they will ever own. In the context of Covid-19, this asset could provide valuable support to low-income households, improving their resilience and broadening their options for responding to the crisis. It could also be the key to unlocking productivity growth and private investment in an economy after Covid-19 – something we will very clearly need. Except, in many cases, this value is inaccessible. Too many housing assets are dead capital, to use the terminology of Hernando De Soto Polar, the Peruvian economist. In lower-income neighbourhoods across SA, ownership as reflected in the deeds registry is a far cry from reality. Most often the de facto ‘owner’ of a property does not match the person officially listed as the owner on the title deed. This may be the result of off-register or informal transactions facilitated by communitybased organisations such as street committees rather than conveyancers, or housing assets remaining in deceased estates that are never wound up. In addition, there is a backlog in registration of subsidy houses, estimated at over 1m units. These properties have been occupied by beneficiaries but were never transferred to them. A comparison of data on the number of new registrations for subsidy properties and the number of units completed each year indicates this backlog appears to be growing amid significant funding to eliminate it. This has incredibly significant repercussions for property-owning households, for the development trajectories of lower-income neighbourhoods and, by extension, the transformation of SA cities. Households who may have purchased their properties informally are at risk of eviction by registered title holders who might dispute that a sale has taken place. Ongoing disputes related to property ownership and the absence of procedurally fair mechanisms to resolve them create instability in neighbourhoods and impact directly on the willingness of the private sector to invest in these areas. In addition, cities are unable to govern effectively; if the city cannot determine who owns properties, it cannot bill for services, nor can it sanction applications for building activity submitted by off-register owners. A significant and coordinated effort across government @finweek

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departments is required to address multiple problems that together give rise to this situation. But with responses to the Covid-19 crisis focusing almost exclusively on household risk to infection, rather than household resilience in the face of the pandemic, required changes to the property transfer system and the underlying policies, regulation and processes that support it may be overlooked. That would be a great pity. More than ever poor households need to be able to leverage housing assets to see them through what is likely to be a prolonged period of financial stress. Some households might need to draw down on equity as a temporary measure, while others might need to sell their properties and relocate. In these times, current policy that prevents beneficiaries of housing subsidies from selling their properties for eight years after transfer is particularly cruel. Rather than protecting poor households from making bad decisions, this policy is likely to force households to transact informally, leaving no opportunity for buyers to access finance, further depressing prices. Other barriers to formalisation will also be felt more acutely during and after the crisis. For instance, policies and processes that govern how deceased estates are wound up require attention, more so now than ever. Some interventions, such as increasing the small estates threshold to enable more households to wind up estates at no cost, can easily be implemented. The legislation governing the transfer of immovable property will need to change before property transfer processes can become affordable and accessible. Likewise, seamless transfer of data between the department of home affairs and the department of justice could enable a truly paperless estate administration process and would significantly reduce fraud. In addition, only the minister of rural development and land reform can appoint commissioners to adjudicate on unresolved property claims. No doubt government has its hands full dealing with the Covid-19 crisis. But it is critical that it allocates some capacity to these interventions. They will materially assist households in managing their own personal crises resulting from the pandemic. Beyond the immediate need, they would unblock critical pathways for household- and private sector-led investment in the future, particularly in lower-income areas. Given the very significant investment made by government in housing to date, and the role of housing on the balance sheets of income-poor South Africans, such action would support SA’s affordable residential property market and enable the development of an inclusive, growing economy after Covid-19. ■ Illana Melzer is the engagement manager at 71point4.com. Kecia Rust is executive director at the Centre for Affordable Housing Finance in Africa.

finweek 8 October 2020

marketplace investment By Schalk Louw

GOLD

Remember, remember, the third of November . . .

Physical gold may well prove a safe bet as investors await American voters’ decision.

n 18 September 2020, Goldman Sachs strategist FTSE/JSE ALL SHARE INDEX (JSE) VS A COMBINATION OF Zach Pandl released a report in which he referred 80% JSE AND 20% PHYSICAL GOLD to this coming November as a “November to remember”. US voters will, for the 59th time, on 1 400 3 November decide who will be their next president. I definitely don’t want to use my space in this column to discuss 1 200 who I think will win this election, but I do want to focus on a few 1 000 troubling matters that Pandl pointed out in his report, should Trump’s competitor, Joe Biden, be elected as the new US president. 800 In short, the report mentioned that if Biden wins, this will most 600 likely lead to an acceleration in the weakening of the US dollar. There are three important reasons for this. Firstly, Biden indicated that a 400 victory for the Democrats could lead to a rise in the corporate tax 200 rate in the US, which will probably make US shares less attractive compared with their international peers. This, in turn, could cause 0 the US dollar to weaken as US companies or shares underperform Aug ’00 Aug ’02 Aug ’04 Aug ’06 Aug ’08 Aug ’10 Aug ’12 Aug ’14 Aug ’16 Aug ’18 Aug ’20 and are sold. The report also states that any regulatory changes 80% FTSE/JSE All Share Index and 20% physical gold (priced in rand) FTSE/JSE All Share Index total return brought about under the Biden administration could have a similar SOURCE: PSG Wealth Old Oak & Thomson Reuters & Iress outcome, especially if it is aimed at the technological sector. Secondly, Goldman Sachs believes that a large fiscal stimulus package would probably lead to the weakening of the dollar, mainly producer, gold still makes out a relatively small portion of the JSE. due to the fact that the US Federal Reserve (Fed) already made In fact, currently there are only five gold-only mines listed on the it clear that interest rates will remain low for longer. Under normal JSE and collectively they make up only 6.5% of the index. circumstances, you usually experience a strengthening in a currency But Rickards referred to physical gold (thus the gold price following fiscal stimulus – because it leads to higher interest rates in rand for South Africans), to which you can gain exposure in a – which, in turn, attracts new investments. New investments variety of ways, such as purchasing gold coins or by investing in in a country contribute to the strengthening of its currency, but exchange-traded funds (ETFs) that will offer you exposure to the research has shown that the opposite tends to happen following underlying metal (not gold mines). fiscal expansion when unemployment figures are high and Normally, an investment in gold in its distinct form is central banks keep interest rates on the low side. considered a speculative investment (something that There are only five goldFinally, Biden’s approach to foreign affairs may also you buy and sell, rather than buy and hold), but I find its only mines listed on the lower the risk premium of certain other currencies. hedging abilities impressive. JSE and collectively they Biden’s administration will most probably be able to If you compare an investment of 20% physical gold and make up only downsize the trade war with China, and not only will this 80% JSE exposure over the last 20 years to a pure JSE be good for the Chinese yuan against the dollar, but also investment, you wouldn’t only be impressed by the fact for other emerging currencies with a high correlation to that the investment with gold exposure delivered 0.5% the yuan, such as the rand. better returns per year (see graph). You see, aside from of the index. So, if Goldman Sachs’s predictions turn out to be the volatile nature of the gold price, it is its low correlation correct, what can I do as an investor to protect my with regular shares that makes it such a good hedging tool, investments against these events? especially in poor economic environments. I recently read The Death of Money: The Coming Collapse of During the last 20 years, the 20% exposure to gold would the International Monetary System by James Rickards, which have meant 15% less volatility (an annual standard deviation of addresses this possibility. Although the book tends to anticipate 14.1% against the JSE’s 16.5%), and it would have meant that the worst-case scenario, Rickards mentions one possible solution in each of the four occurrences (since August 2000) where the to the problem in the form of physical gold – more specifically JSE declined by more than 10%, you would have, on average, through allocating 20% of your investment portfolio to physical side-stepped six percentage points of each decline. If we isolate gold as a hedge against the weakening dollar. the market collapses of 2008 and 2020, the portfolio with 20% Many experts, including myself, have discussed why gold is exposure to physical gold would have side-stepped more than 10 such a good hedge against a weakening dollar, so in this column percentage points of each decline. ■ I decided to test Rickards’ strategy with the FTSE/JSE All Share editorial@finweek.co.za Index (JSE). Even though SA is the world’s eighth-largest gold Schalk Louw is a portfolio manager at PSG Wealth.

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INFLATION

What to do when cash returns disappear?

Photo: Shutterstock

As monetary authorities keep interest rates lower for longer, income-based investors are losing out. ust over a year ago I wrote about negative yields after having been scratching my head about the concept for some time. My conclusion was that a negative yield wasn’t that uncommon. Gold, for example, had an effective negative yield due to storage and insurance expenses. But I did conclude that negative yields were ultimately nonsensical and would, surely, in time revert to normal. I haven’t changed my mind on the first point, but the reverting to normal part has at best been delayed for many years. US Federal Reserve (Fed) chairman Jerome Powell has said the bank will be keeping rates at zero until at least 2023, while the Bank of England said in its latest rate announcement it is exploring negative interest rates. This is because of the coronavirus pandemic, but it has got me thinking a lot about negative interest rates again. South Africa’s prime lending rate is not close to zero, but at 7% is at multi-decade lows, and our Monetary Policy Committee (MPC) has signalled that any increases would only be implemented by late 2021 at the earliest. Staying local, a 7% prime rate has a lot of implications for investors. Firstly, those that live off income from cash or near-cash investments have seen their income collapse as the prime rate has reduced. Seeking better rates will most often push up the risk. Sure, you may get offered an attractive 10% interest rate, but is it sustainable and will the provider honour the deposit agreement? Chasing higher rates will increase the risk, which is exactly what those looking for income do not want – and any rates much higher than prime should be viewed with deep scepticism. Listed preference shares and government retail bonds are certainly an attractive option, with the latter currently offering 8% for five years, while quality preference shares are at about the

finweek 8 October 2020

same rate. OUTvest has an endowment paying a simple 10.7% rate if you’re in the top tax bracket and have exhausted your interest exemption, but here your investment is locked in for five years. For investors, low interest rates make the stock market more attractive as, suddenly, a dividend yield of, say, 4% is not so bad compared with current bank rates for cash. This is especially the case if you consider that you also get the potential of capital appreciation. Furthermore, a lot of investors who’d rather buy the relative safety of government debt, or put their money in the bank, are moving into the stock market as they seek returns for income. Back when interest rates were first being slashed in 2008 and 2009, inflation was a concern, but inflation has disappeared worldwide – even as the US hit an unemployment rate below 4% at the beginning of the year. One would expect low unemployment to drive wages higher and hence spending and inflation. But inflation remains subdued and I’ll cover this in detail in a separate column. But the real question is when will rates rise again and some sort of normality return? I suspect the Fed and our MPC are probably both wrong and we’ll see lower rates for longer, much longer. This is especially the case after the Fed said it will use an average inflation rate rather than the 2% line in the sand – giving it a lot more wiggle room for lower interest rates for longer. If inflation is not rearing its head any time soon, why raise interest rates? Why not keep the cost of borrowing money low, especially as it should support growth? For income investors this has serious implications. Rather than just holding on and hoping, one should have a hard look at restructuring both the investments and also the expenses side of this equation. ■ editorial@finweek.co.za

Those that live off income from cash or near-cash investments have seen their income collapse as the prime rate has reduced.

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marketplace markets By Maarten Mittner

STOCKS

For now, betting on market risk has paid off

The question now is how the Fed’s new stance on inflation will affect investors.

espite some pullback from recent highs, the traditional undervalued stocks? big technology stocks have remained resilient If the past decade is anything to go by, it certainly seems in the face of many challenges. Global tech so. The ghost of the dotcom bubble of 2000 has seemingly companies have made a quicker recovery finally been buried as tech stocks staged a remarkable from the 2020 pandemic slump compared with the market recovery, largely because of the easing environment, with setback of 2009. interest rates not set to rise anytime soon. Back then the recovery was slow and hesitant. It took four The US Federal Reserve (Fed) has reaffirmed this view by years for the S&P 500 to reach a new high after 2009 as the tweaking its inflationary stance. It now aims for 2% inflation reversal affected a broad-based range of stocks, including big “on average” and not an absolute level of 2%, meaning tech. This year, it took six months for the S&P 500 to again inflation may rise above 2% at times without the Fed raising trade at its previous high. interest rates. Although this change may appear trivial, it But now it has stalled in what some analysts describe as a is an acknowledgement that deflationary pressures may healthy correction. present a bigger problem than real inflation, bearing in mind Although the technology-rich Nasdaq Composite that the 2% target has consistently been missed. Index has gained 60% since its March lows, bouts of Which is all good news for big tech stocks on US negativity may yet cause the index to stumble to lower equity markets. Although the technology-rich levels. The tech market is carefully poised at present Paradoxically, the tech surge has paused in response to Nasdaq Composite Index has gained and dependent on the continued rolling out of new the new Fed stance as the Fed may not have done enough. products and maintaining strong earnings. The market is seemingly alarmed about the Fed’s stance But those investors betting on risk after the March to boost inflation. Is deflation not therefore the bigger lows have done much better than those exposed to the problem? Does it not point to structural deficiencies in the languishing traditional sectors such as energy, banking, market in Japanese style, where stimulus policies have since its March lows, bouts of retail and property. failed dismally over the past few decades? negativity may yet cause the The big-tech surge occurred despite defying deeplyHowever, if the concern remains deflation, tech stocks index to stumble to lower levels. held conventional market wisdoms. These include that could once again come to the rescue of the market. They it is prudent to diversify risk; to buy at low levels and are in an eminently advantageous position to capitalise sell at high valuations; and preferring solid, asset-rich, further on the loose monetary environment. More dividend-paying enterprises in trying times. so than traditional stocks, where the recovery is For years, buying Amazon at inflated price-toexpected to be slower. earnings (P/E) ratios has benefitted investors This all could have profound implications for embracing risk, while risk-diversifying investors the average investor. have paid the price with exposure to lame-duck If earnings among big tech companies sectors such as retail and energy. remain robust, and the tilt towards a global In response, many asset managers have digital economy gains further momentum diversified to big tech, including billionaire – and barring any further rising geopolitical investment guru Warren Buffett. But dipping tensions between the US and China – tech your toes into Apple or Microsoft with a 5% or so stocks may even become risk havens in exposure is not the same as being full weight in the themselves on a more permanent basis. That is if big tech stocks themselves. investors can look past short-term reverses and a It is those investors with a big exposure to Apple, volatile trading environment. Amazon, Microsoft, Facebook and Alphabet (owner of The past decade has shown it could be riskier to invest Google) who are laughing all the way to the bank or into in traditional stocks than big tech as the returns have been retirement. Barring an unlikely reversal of easing monetary much lower. policies by central banks, the growth among tech stocks is Those investors brave enough to now invest in likely to continue for some time yet. undervalued traditional stocks may yet enjoy the fruits of What would then be an appropriate approach to risk turnaround growth in the years to come. But the risk may be investments? Is it not riskier to invest in retail and property bigger as the inexorable march towards a digital future seems stocks, despite many ticking the right financial boxes on set to continue. ■ undervalued valuations? Does an investment in Microsoft editorial@finweek.co.za and Amazon not entail less risk than putting money in Maarten Mittner is a freelance financial journalist and a markets expert.

Photo: Shutterstock

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marketplace Simon says By Simon Brown

HYPROP Hyprop’s super-regional shopping centre, Canal Walk.

Simon’s stock tips Founder and director of investment website JustOneLap.com, Simon Brown, is finweek’s resident expert on the stock markets. In this column he provides insight into recent market developments.

GRAND PARADE INVESTMENTS

R4bn drop in A story of asset valuation failed deals Hyprop’s results for the year ending 30 June saw the devaluation of its property by R4bn, which is equal to its current market cap. Distributions to shareholders were cut, but the company remained within its debt covenants. Overall, property companies’ results released so far have mostly not been as bad as expected, and foot traffic and rental payments have improved markedly since the hard government-imposed lockdown of April and May. But this remains a sector that I am mostly staying away from. New rental agreements are under pressure, both in terms of the rates being charged but also, I would suspect, in terms of finding new tenants. We may still see property values decreasing and that puts more pressure on their loan-tovalue metrics. However, two positive trends in the property space are logistics and rural malls. The latter has seen a quick return to pre-lockdown levels of traffic, while superregional malls are still behind pre-lockdown traffic. Logistics has been the big winner, not only because of increased online shopping, but because they operate in a different part of the supply chain. Malls are right at the end of the chain and thus suffering, but logistics and warehousing continue to see demand.

finweek 8 October 2020

Grand Parade Investments’ results for the year ending 30 June is a story of failed deals. The sale of Sun Slots collapsed in June after the conditions could not all be met, while the sale price of Burger King, announced in February, is being renegotiated. The Sun Slots sale is maybe worth R500m and the Burger King and allied assets should easily get a similar price, taking the total value of proposed sales to R1bn. Grand Parade’s current market cap is just under this level. This leaves the company’s stakes in Spur, various properties and the Worcester and SunWest casino shareholdings, which the group values at around another R1bn. So, on the surface, a lot of potential value to be unlocked here. But I remain extremely cautious of value-unlock deals. They most often don’t meet expectations and Grand Parade has been promising to unlock value for some time, with no results so far. The problem is that the group has potential obligations of

1.45bn shares.

PURPLE GROUP

A messy share restructure Purple Group* on 25 September issued an announcement to the market containing two issues. The first is to change the par value of its shares from the current 1c to zero cents. In terms of the new Companies Act of 2008 – which came into force in 2011 – companies can only issue shares at no-par value. This contrasts with the older version of the legislation – dating from 1973 – which allowed for par-value shares. This value has no impact on the actual share price. The latter is decided by the buyers and sellers on the stock exchange. The reason for the reduction in par value is because they want to increase the authorised number of shares, which is prevented by the Companies Act if these shares have a par value. Changing that to zero enables Purple to increase the number of authorised shares – i.e. the total number of shares that can be issued to investors and traded in the market. The difference between the authorised and issued shares is held by the company and can be issued for cash, staff bonuses, acquisitions and the like. Purple has issued 982m shares of the 1.2bn authorised ones. The problem is that the group has potential obligations of 1.45bn shares. This includes a convertible loan, which converts at 22.87c for just under 139m shares (and which I think may well be converted). Furthermore, Purple has a staff incentive scheme of just over 158m shares and a Sanlam put option. Sanlam paid R100m for a 30% stake in Purple’s Easy Equities business, but the put option allows Sanlam to elect to essentially give back the stake in return for their R100m. Purple has assumed that if this happens (I don’t think it will) it will have to issue new shares at 70c to raise the money (I think new shares at 70c would be a tough call). All of this resulted in the need for the share capital changes. My concern here is that it is messy of the board to have potential obligations above the current number of authorised shares, and this should have been dealt with years ago when the loan and Sanlam deal were undertaken. www.fin24.com/finweek

marketplace Simon says

ANCHOR CAPITAL

ONELOGIX

Lukewarm for a hot sector

Delisting on the way?

Stockbrokers have enjoyed a great 2020. But Anchor Group’s results for the six months ending 30 June did not live up to my expectations. After removing the termination fee from Astoria, which was received in the corresponding period a year ago, headline earnings per share (HEPS) was only 8% higher in the latest reporting period. This was due in part to the increased demand for fixed-income products that have a lower profit margin. This, however, isn’t the whole story as only about R10bn of total assets under management and advice worth R65bn constitutes fixed income. Operating expenses increased by 12%, which is in line with the increase in assets under management and advice (up 13%). However, I would have expected to see some operational leverage coming through in the latest results. Overall, they were disappointing results for me in what should be a hot sector right now.

OneLogix’s results for the year through 31 May saw the first profit decline in 11 years, even as the group has diversified away from just vehicle deliveries in recent years. The sale and lease back of its Umlaas road development (after the results release on 17 September and thus not reflected in these numbers) will significantly reduce the company’s debt and leave the balance sheet looking solid. With the share price down at around 2012 levels, and about 50% below the net asset value, I think a delisting offer to minorities is very likely here.

PAN AFRICAN RESOURCES

Debt slashed on gold surge

Photos: Hyprop Investments | Shutterstock | Gallo/Getty Images

TONGAAT HULETT

Pan African Resources’* results for the 12 months ending 30 June saw HEPS increase by about 100% and debt almost halving. These results were released on 16 September. Pan African received an average gold price of R750 000 a kilogram, with the current price at around R1m/kg. The miner’s remaining debt could be gone by the middle of 2021, but new projects will see new debt with a payback period of about three years. All the gold miners have had a great 2020. Nevertheless, Pan African remains my preferred stock with the risk, of course, being the gold price. Gold has been under pressure and fell below $1 900 an ounce on 21 September. This is not unexpected and a run to new record highs remains a serious possibility. If that does happen, having a gold miner in your portfolio makes absolute sense. @finweek

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Starch is gone The Tongaat Hulett deal to sell its starch business to Barloworld is proceeding. Having been announced in February, Barloworld tried to cancel the deal due to the Covid-19 pandemic but an independent arbitrator has ruled that there was no “material adverse change” that would result in the cancellation of the transaction. Tongaat will receive R5.35bn and this will go some way to reducing its debt. This does change the business, as starch was a steady earner for Tongaat amid a slump in land sales and the cyclicality of sugar. Thus, Tongaat’s future earnings will be more volatile. That said, the starch division was never large enough to smooth earnings much, rather it added a regular base to the company’s earnings. The next question is whether Tongaat will sell off its land and become a pure sugar player? I suspect not, but with a lower debt burden the company will be worth a look when the results for the six months ending September are published in January.

All gold miners have had a great 2020. Nevertheless, Pan African remains my preferred stock.

WOOLWORTHS

When’s the exit Down Under? Woolworths’* results for the 52 weeks ending 28 June were as expected. Local food sales did great, fashion continues to disappoint, and Australia is a disaster. My view is that the new CEO (who comes from Levi Strauss & Co. with a strong fashion retail background) will look to exit Australia and place his focus on fixing the local fashion offering. It won’t be easy, as lost customers are hard to win back, but Woolworths has been so bad at it over the last couple of years that even a small improvement could see gains. ■ editorial@finweek.co.za * The writer owns shares in Purple Group, Woolworths and Pan African Resources.

finweek 8 October 2020

marketplace technical study By Lucas de Lange

JSE

Gold bull not done running yet

A hotly-contested US presidential election could spark new highs. here should be more opportunities to make money from gold and gold shares, judging by the pronouncements of Citigroup. The international banking group is predicting the gold price to reach new record levels before the end of the year. It reached an all-time high in August, but has since lost about 10%. Citigroup believes gold is in the middle of its current bull cycle. The JSE’s gold index has, however, weakened by some 25%, which confirms that speculators – as always when gold is on the move – are active in gold shares. Citigroup says the new high could partly be a result of risks related to the US presidential election. The election “could be an extraordinary catalyst” for the gold price late in the fourth quarter. The bank believes the uncertainty associated with this election “may be under-appreciated” by precious metal markets. Usually markets perform well in a presidential election year, but the coronavirus pandemic is causing huge uncertainty, which could rattle market players. Most commentators apparently share Citigroup’s optimism, but the World Gold Council in London points out that the underlying demand for the yellow metal has weakened. It declined by 6% on an annual basis in the first half of the year, but the very large downturn was in the demand for jewellery. It slumped by 46%, while gold bought for use in technology declined by 13%. Investment in gold bars and coins weakened by 17% year-on-year in the second quarter. Even central bank purchases were lower. The Gold Council warns that a price would be paid in the long term for the money created by authorities and the huge increase in government debt to stimulate economic growth. Nevertheless, deflation is a bigger threat in the short term than inflation. There is some support in its report for Citigroup’s point of view. The council’s chief marketing strategist, John Reade, points out that gold has little correlation with other asset classes. He calculates that the average pension fund in the US would have enjoyed a higher risk-adjusted return

finweek 8 October 2020

over the past decade had it allocated a larger portion of its portfolio to gold. In the current year to date, gold has been the best-performing asset class. In the medium term, the investment demand will remain the key to gold’s performance, says Reade. What gold means for local investors, is reflected in the results of the gold mining groups. At least the dividends being distributed compensate to some degree for the losses suffered because so many companies are not paying dividends. The extent to which mines are flourishing is apparent from the figures produced by, among others, AngloGold Ashanti. The company’s profits have trebled in the six months to end-June, despite a drop in production. As can be seen in the table of the weakest shares, property counters are still experiencing great hardship. It is one of the sectors where businesses are forced to sell valuable assets to relieve pressure on their balance sheets. For example, according to reports, the Hyprop Group intends selling Hyde Park Corner and Rosebank Mall in Johannesburg. These properties are regarded as being part of the group’s crown jewels and it’s an open question whether good prices will be negotiated during the current weak market. There are other major companies that are sitting with the same dilemma, such as Sasol, which is expected to sell off a big chunk of its Lake Charles chemical plant in Louisiana in the US. This is a typical phenomenon when conditions deteriorate to such an extent that companies that are sitting with piles of debt are forced to sell valuable assets in order to get cash in hand. There is little happening in the case of shares listed in the “breaking through” column. British American Tobacco looks fairly interesting, owing to some buying pressure; while Richemont and AngloGold Ashanti are lying close to their long-term averages, which quite a number of market players see as a buying area. ■ editorial@finweek.co.za Lucas de Lange is a former editor of finweek and the author of two books on investment.

WEAKEST SHARES* COMPANY

NAMPAK FORTRESS B VUKILE HYPROP REDEFINE INVESTEC LTD NEPI ROCKCASTLE CAPITAL & COUNTIES RCL LIBERTY HOLDINGS NEDBANK OLD MUTUAL REMGRO RESILIENT BARLOWORLD GROWTHPOINT TELKOM MPACT SANLAM MERAFE ASTRAL VIVO DISTELL ABSA TFG SASOL STANDARD BANK NETCARE TRUWORTHS MTN GROUP SAPPI KAP ADCOCK INGRAM LIFE HEALTHCARE DIS-CHEM PEPKOR HOLDINGS MOMENTUM METROP BIDVEST SANTAM IMPERIAL AECI PICK N PAY FIRSTRAND MC GROUP MASSMART MR PRICE RHODES PSG KONSULT BIDCORP CAPITEC AB-INBEV OCEANA ASPEN WOOLWORTHS EXXARO EQUITES

% BELOW 200-DAY EMA

-77.4 -61.3 -51.7 -49.2 -47.9 -39.1 -34.7 -33.9 -33.8 -33.2 -31.6 -30.6 -30.2 -27.8 -27.2 -26.4 -26.3 -24.8 -22.7 -22.1 -20 -19.8 -19.7 -19.6 -19.3 -18.5 -18.5 -18.2 -18.1 -17.8 -17.5 -17.2 -17.1 -16.5 -16.3 -16.2 -15.9 -15.7 -15.5 -15 -14.3 -13.8 -13.2 -10.6 -10.4 -10.3 -10.1 -9.8 -9.4 -8.6 -8.3 -7.8 -7.8 -7.3 -7 -6.6

WEAKEST SHARES* COMPANY

MEDICLINIC QUILTER CLICKS GLENCORE AVI RMI HOLDINGS JSE CORONATION VODACOM SIRIUS TIGER BRANDS SUPERGROUP REINET

% BELOW 200-DAY EMA

-5.7 -5 -4.7 -4.6 -3.8 -3.8 -3.5 -3 -2.1 -1.7 -1.4 -0.2 -0.1

STRONGEST SHARES* COMPANY

% ABOVE 200-DAY EMA

ROYAL BAFOKENG PLAT NORTHAM GOLD FIELDS CARTRACK PAN AFRICAN RESOURCES SHOPRITE HARMONY AFRICAN RAINBOW MINERALS SIBANYE-STILLWATER DRDGOLD ITALTILE IMPLATS ZAMBEZI PLATINUM PREF PROSUS DISCOVERY BHP KUMBA IRON ORE INVESTEC AUSTRALIA PROPERTY FUND MONDI TRANSACTION CAPITAL SPAR NASPERS ANGLO AMERICAN THARISA ALTRON A SOUTH32 RICHEMONT ANGLOGOLD ASHANTI BAT

44.1 35.8 29.1 26.4 23.4 18.9 17.2 15.7 14.4 12.1 10.2 9.7 8.5 8.1 7.7 7.5 7.5 7.3 6.8 6.5 5.6 4.8 4.2 3.7 2.6 2.1 2.1 2 0.7

BREAKING THROUGH* COMPANY

SOUTH32 RICHEMONT ANGLOGOLD ASHANTI BAT

% ABOVE 200-DAY EMA

2.1 2.1 2 0.7

*Based on the 100 largest market caps.

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cover story agriculture

AGRIBUSINESSES’ CHANGING PLAYING FIELD The local agricultural sector’s exceptional performance since the beginning of the year has players in the industry rearranging themselves. By Jacques Claassen

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finweek 8 October 2020

cover story agriculture

“At all times we prefer our liquidity buffers to be more than 10%. Our policy for dividend growth contains a good guideline of 67% reinvestment.”

ince 1994, South Africa’s former agricultural cooperatives have generally transformed themselves into well-managed agribusinesses. In fact, they are still undergoing a process of further consolidation, capital formation and value creation for shareholders. But the coronavirus pandemic means this is happening against a backdrop of the worst crisis and disruption since World War II. Besides the rearrangements taking place on the field on which agribusinesses play, it is interesting to also take note of the latest economic indicators (see box on p.43).

Business playing field

Francois Strydom, CEO of the agribusiness Senwes, points out that the field on which the country’s large agribusinesses play is increasingly in a state of flux. In fact, he expects possibly only four major groupings could remain within the next 12 to 18 months. Currently there are only ten or so large agribusinesses of a cooperative nature that supply input resources and technical, financial and marketing services to producers – compared with more than 30 in the late 1980s. Apart from agribusinesses that focus on, among others, citrus and ostrich farmers, some of the major agribusinesses are (in alphabetical order and with the location of their headquarters in brackets): Acorn Agri & Food (Somerset West); BKB (Port Elizabeth); GWK (Douglas); Kaap Agri (Paarl); KLK (Upington); NWK (Lichtenburg); OVK (Ladybrand); Senwes (Klerksdorp); Suidwes Landbou (Leeudoringstad); TWK (Piet Retief); and VKB (Reitz). Among these companies there has been some rearrangement over the past year or so. The Senwes Group has embarked on a strategic alignment process in which it had taken over Suidwes and acquired a 58% shareholding in KLK last year. As a result, Senwesbel Limited – the biggest shareholder in Senwes – has changed its name to Agribel Holdings Limited (Agribel). In 2019, Senwes had acquired Falcon and

finweek 8 October 2020

Staalmeester, two manufacturers and importers of agricultural implements. Moreover, currently the boards of directors of GWK and VKB are in talks about investigating the possibility of a partnership between the two companies. VKB already has a 30% shareholding in BKB.

How are the players performing?

Francois Strydom CEO of Senwes

Corné Kruger Group financial head of Senwes

Dr Herman van Schalkwyk CEO of Suidwes

The Senwes Group: This ZAR X-listed group is one of the country’s strongest players in the summer grain areas. It has a broad footprint in all provinces except Limpopo. It follows an integrated business model, while it is also one of the exclusive John Deere franchises in the central and eastern areas of the country. Apart from bona fide farmers, who hold 52% of Senwes’ shares through Agribel, Grindrod has a 21% interest in Senwes, while the rest of the shares are trading freely. “We tested financiers’ appetite over the years and have developed a good feeling for the optimal capital structure,” says Corné Kruger, the group’s financial head. Senwes allocates enough capital for growth, but also ensures the balance sheet doesn’t become sluggish and expensive. The group guards against too aggressive investment in both defensive assets that erode returns and in growth capital which leaves the playing field open for competitors. “At all times we prefer our liquidity buffers to be more than 10%. Our policy for dividend growth contains a good guideline of 67% reinvestment, which is adequate to function within capital guidelines. In addition, we regularly offer an opportunity for participation in a share buy-back programme. Good dividends, support values for security and a full-share performance scheme ensure alignment with our management,” according to Kruger. Suidwes Landbou: The Competition Tribunal approved this company’s merger with Senwes in August, subject to certain conditions concerning continued service delivery and infrastructure, meaning implementation can start now. Senwes has undertaken to retain and expand the brand name.

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Photos: Shutterstock I Supplied

cover story agriculture

Dr Herman van Schalkwyk, CEO of Suidwes, is enthusiastic about new possibilities to add value and for suitable credit solutions. The two parties will expand their current financing offer of R60m over a period of three years to qualifying emerging black farmers. KLK: This company, in which Senwes has acquired an interest of 58%, has a strong annual turnover and is involved in the supply of agricultural supplies; building material; fuel; the sale of meat, hides and skins; vehicles; the auctioning of livestock; as well as the packaging and export of raisins. KLK bought out the interests of BKB in the Northern Cape years ago. VKB: This agricultural player still has a cooperative model and currently does not offer investment opportunities to ordinary investors. “We are currently not listed, but we are in the early planning stages of listing on ZAR X – subject to members’ approval. With the listed non-voting share, we want to give shareholders the opportunity to unlock cash earlier than the redeemable shares currently allow,” says VKB’s chief executive, Koos Janse van Rensburg. Despite negativity in some of its agricultural sectors, VKB is looking forward to a better year than last year’s mediocre performance. GWK: This company, which is currently engaged in negotiations with VKB, is involved in the following agricultural markets: maize, wheat, oilseeds, cotton, dried beans, olives, wine, and meat through abattoir businesses and livestock auctions. OVK: Apart from diversified service delivery, OVK has a wide footprint in grain areas (dryland and under irrigation) as well as extensive stock-farming areas. Only bona fide producers hold a 51% interest through OVK Holdings. The remaining 49% interest in OVK Limited is freely tradable for anyone who contacts the secretariat in this regard. “The company has been following a set policy of one quarter of the net after-tax profit being paid out as dividends for some years, so 75% of the annual net profit is reinvested in the expansion and support of our operations,” according to Stéfan Oberholzer, managing director of OVK. “The shares’ liquidity is evident in the fact that 5.9% of the issued share capital was traded on the open market during the past financial year. Over the past two years, the share price increased by 17.1% (OVK Limited) and 10.8% (OVK Holdings). The return on shareholder investment for the past five years was more than 16% per year.”

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Koos Janse van Rensburg Chief executive of VKB

Pieter Kleingeld Financial head of NWK

NWK: On 8 September, this group, which is particularly active in the North West province, delisted from the 4AX exchange because it no longer sees its listed dual structure as being beneficial. Only NWK Holdings (holding company of the NWK Group) is now a listed entity. Any bona fide commercial agricultural producer can buy shares in NWK through the holding company. “If one looks at the market values, it is apparent that the shares of agribusinesses generally trade at a reasonable discount to their net asset values. This makes these shares relatively ‘cheap’ while the dividend yield is quite a bit more than what can traditionally be expected on the JSE. The only drawback is that the trading is more limited; it requires a longer-term outlook,” according to Pieter Kleingeld, NWK’s financial head. Kaap Agri Ltd: Although this group is listed in the retail sector on the JSE, it also renders typical services to its agricultural clients. It, however, felt the impact of the lockdown period in various spheres, such as alcoholic beverages, tobacco and fuel sales, as well as the restrictions to which fast foods and the restaurant industry were subjected. According to its chief executive, Sean Walsh, Kaap Agri experienced a relatively sharp V-recovery curve following the lifting of every lockdown restriction. The last three months of Kaap Agri’s financial year, which ended on 30 September, were expected to still be challenging, although good winter rains did bring relief. Kaap Agri has adopted a wait-and-see approach to what the long-term effect on consumer spending will be. “We are well-positioned to capitalise on any meaningful opportunities that come our way over the next six to 18 months,” according to Walsh. Graeme Sim, Kaap Agri’s financial director, says they measure sustainable performance in terms of returns over the longer term – with a focus on wealth creation per share. “We use the total return index (TRI) as a measuring instrument; in other words, the compound annual growth rate of an investment.” According to Sim, this is a good measuring instrument and a reliable way to see how you are performing compared to other companies. “From 2010 to 30 September 2019, Kaap Agri’s TRI was 21% a year. If you’d bought Kaap Agri shares worth R1m on 30 September 2010 and reinvested all your dividends, your investment would have been worth R5.6m on 30 September 2019,” according to Sim.

finweek 8 October 2020

cover story agriculture

BKB Ltd: This group, which has a national footprint, puts us in a good position for growth through strategic is a player in the livestock and fibre industries. It has also purchases,” says André Uys, the group’s chief executive. diversified into other areas, notably the supply of fuel According to him, agribusinesses traditionally and other production input resources; the sale of basic attracted individuals as shareholders and not really groceries; the packaging and export of raisins; a sugar institutions. “The trading of shares and the attendant packaging plant in Eswatini; and the processing and liquidity are indeed a challenge, even for us who manage export of lucerne. The company our own over-the-counter trades. But is also a small specialist player in we have no limitations on our share “It has the potential of trading, maximum shareholding or the storing and milling of grain. According to Johan Stumpf, who may be shareholders. The more becoming a political BKB’s managing director, the limitations or conditions you have, the group has had a relatively good football. Yet, Covid-19 fewer investors you will attract. The year after good rains, especially in smaller stock exchanges and even the underlines the necessity JSE currently do not really offer any the livestock industries. However, its fuel sales dropped during the additional benefits. of food security and lockdown period, while the fibre “At the end of February 2020, our and raisin industries are also net asset value per share was R21.75 the agricultural sector’s under pressure. On the positive and we were trading at R15.99, strategic role.” side, the group’s sugar operations implying that we are trading at a achieved record profits during discount to our net asset value.” the lockdown period. TWK: This diversified agricultural “Historically, BKB has and forestry company is mainly active maintained a strong balance sheet, with its debt-toin Mpumalanga and KwaZulu-Natal, but it also has capital ratio being less than 0.6,” according to Stumpf. business interests in other provinces and in Eswatini. “After African Rainbow Capital divested from BKB a Only bona fide farmers are allowed to invest in the year ago, VKB acquired an interest of 30% in BKB. holding company, but anybody can buy shares in the This, together with two difficult operating years, had a listed TWK Investments. negative effect on BKB’s balance sheet.” On closer examination During the lockdown period, BKB aggressively According to Theo Vorster, CEO of Galileo Capital, there focused on reducing working capital, also significantly is still policy uncertainty in the SA agricultural context. reducing its debt levels. “Liquidity is good at the “It has the potential of becoming a political football. Yet, moment, but for the next six to 12 months we will not Covid-19 underlines the necessity of food security and be fixing our aggressive focus on further acquisitive the agricultural sector’s strategic role.” growth. Over the next two years, the focus will be on Christo van der Rheede, Agri SA’s executive director, getting non-performing business units to turn around also believes the second quarter’s GDP figures have and to get the balance sheet back to historical levels.” once again emphasised the important role that the BKB’s shares can trade freely and there are no agricultural sector plays in SA’s economy. limitations on who may own them. “With legislation According to Senwes’s Strydom, the predicted making over-the-counter trading complex, we were looking at a possible listing before Covid-19 struck – not weather patterns look very promising for agricultural necessarily with the aim of acquiring outside capital, but production in the short to medium term. However, there is some concern over consumer demand for food over to simplify the process of share trading.” the longer term due to the destructive impact of the Acorn Agri & Food: The origin of this verticallyCovid-19 lockdown. GDP performance going forward integrated agricultural and food group goes back more will therefore be crucial. According to BKB’s Stumpf, than 100 years, but it adopted its current form after the there has been a move away from the consumption of merger of Overberg Agri and Acorn Agri in 2018. luxury foods in favour of basic foods. “We have identified certain sections of the value Vorster believes prospective investors should chain where we see long-term growth. We have strong brands in the group (Overberg Agri, Moov and Montagu consider agribusinesses with a mixed business model Dried Fruit) and we believe that we will experience good that offer good value. “Uncertain times create the best investment opportunities, and the agricultural sector is growth, especially in the health foods space. A material one of those opportunities,” says Vorster. ■ portion of Acorn Agri & Food’s balance sheet is assets editorial@finweek.co.za held for sale, which will be turned into cash and which

finweek 8 October 2020

Johan Stumpf Managing director of BKB

Theo Vorster CEO of Galileo Capital

Christo van der Rheede Executive director of Agri SA

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cover story agriculture

Agricultural economic indicators According to Stats SA, the agricultural sector grew by 15.1% in the second quarter of the year and is the only sector that made a positive contribution to GDP, of 0.3 percentage points. ■ This followed on the sector’s first quarter growth of 27.8%, according to Wandile Sihlobo, chief economist at the Agricultural Business Chamber. ■ This performance was thanks to an increase in summer grain, fruit and animal production after better rains. ■ A weaker rand-dollar exchange rate is assisting exports. ■ The maize crop of 15.5m tonnes is the second-largest in SA history. Even when taken in real terms, it has the highest rand value ever. ■ The slaughtering of livestock has dropped owing to the lockdown, but is expected to recover in the third quarter. At the time of writing this article, beef prices continued to rise while mutton prices moved sideways, but they are expected to increase in December. ■ Some agribusinesses are experiencing excellent sales of lime, as well as firm sales in their mechanisation divisions. On the other hand, the fluctuating international markets are making the management of margins extremely challenging for agribusinesses that run oil presses. ■ The marketing of fibre remains under pressure due to a wool surplus in Australia and the disruption caused by the coronavirus pandemic. ■ The negative effect that Covid-19 has had on the poultry industry has started to abate in the interim. ■ The index for agricultural business confidence increased from 39 points in the second quarter (its lowest level since 2009) to 51 points in the third quarter.

Photos: Supplied

■

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Etienne Nel CEO of ZAR X

A good crop of listings By Jaco Visser

Those agribusinesses which were forced to list their shares have been a boost to some local stock exchanges. But not so much the JSE. In 2016 and 2017, the JSE came down hard on the over-the-counter trading practices of agricultural businesses, mainly former cooperatives. This bourse enforced the Financial Markets Act, which requires an institution carrying on with over-the-counter trading in shares, in the way it was done by the former cooperatives, to apply for a stock exchange licence. Whether this was done in a bid to lure these companies to list on the JSE is unclear. But it didn’t work out well for the JSE. Only one of the large agricultural businesses, Kaap Agri, listed on the JSE. Two others, Senwes and TWK, opted for the ZAR X. NWK went to 4AX. And the flood gates of listing have since been open for ZAR X. Senwes was this stock exchange’s first listing. With some of these agribusinesses’ ownership structures, only bona fide farmers can own shares. Senwes, majority-owned by Agribel, is a case in point, with the latter owned by farmers. “We are uniquely positioned in terms of our operating model to list restricted securities such as Agribel Holdings (previously Senwesbel); these shares can only be traded by bona fide farmers and the ZAR X technology stack is able to manage this restriction

seamlessly,” Etienne Nel, CEO of ZAR X, tells finweek. Many of the large agribusinesses offered the over-the-counter trading of their shares freely back in the day. In some instances (the writer was invested in one such old cooperative), the matching of bids and offers were done once a month – usually by the company secretary or their nominee. With these shares now trading in real time and on a public exchange, price exploration is enhanced. In addition, where farmers offered these shares to the agribusiness as security for production credit, the stocks can now be offered to a wider range of lenders. “Farmers are also able to pledge their listed shares on better terms to the banks for production credit,” explains Nel. In addition, there are benefits for these agribusinesses in listing their shares on an exchange. “Listed companies get better credit terms from banks and they are able to acquire other assets and companies using listed paper as payment,” says Nel. “In addition, it raises the profile of the company as they are now exposed to a wider audience of investors and it gives them the ability to retain key staff using share options.” ■

finweek 8 October 2020

on the money management By Amanda Visser

Burnout is now an ‘occupational

Changes to how people work amid the coronavirus pandemic are bearing down on their psychological well-b

ost South Africans currently experience some form of distress – when there is no break from stress. Although it can be a positive energy that gets us out of bed and going during the day, the red flags shoot up when stress becomes distress. The Covid-19 pandemic, prolonged periods of physical confinement and increased levels of anxiety pushed many people from being distressed to being burn out. The World Health Organization has reclassified burnout as an occupational phenomenon rather than a medical condition. This has huge implications for the workplace, says Danie du Toit, registered industrial psychologist. “Burnout is likely to become an occupational disease caused by work-related stress. Employers are thus likely to be held responsible for it, like an accident at work.” The symptoms to look out for and to act upon include increased cynicism and depersonalisation, diminished efficiency, exhaustion, and a loss of emotional and cognitive control.

Danie du Toit Registered industrial psychologist

Dealing with it

Photos: Supplied

Stress, distress … burnout

Renata Schoeman, a psychiatrist in private practice and head of MBA in Healthcare Leadership at the University of Stellenbosch Business School, says when stress becomes too much, too continuous, too intense and too frequent it turns into distress. “We then experience emotional, mental and physical fallouts from the stress.” Distress over a continuous period within an occupational environment is considered burnout when it manifests as depersonalisation, reduced efficiency and severe mental and physical fatigue. People who are burnt out feel disconnected from others, don’t feel like making small talk and start disengaging from their work. They struggle to concentrate and have somatic symptoms such as indigestion, sexual problems, chronic headaches and muscle tension. Adri Albertyn, managing director of Maurice Kerrigan Africa, says they look at ways to identify burnout correctly as it is often misinterpreted. Top performers are often labelled as “they used to be good but have become disillusioned”, or “they are no longer able to be competitive”. Organisations are “quite tough” on these “symptoms”, rather than making sure driven and ambitious people take the necessary breaks – either for a learning experience or some time just to do absolutely nothing, says Albertyn. Schoeman has seen an increase in behavioural changes in people over the last few months – depression, irritability and eating or drinking disorders to 44

finweek 8 October 2020

“feel better”. “The initial ban on alcohol led to some good lifestyle changes. People were religiously trying to use the hours we were allowed to exercise, they refrained from alcohol and some even tried to stop smoking, although most people got their cigarettes on the black market.” Gestaldt Management Consultants conducted a survey among their clients in the financial sector to determine the impact of Covid-19 and the lockdown. Thapelo Mahlangu, managing director of Gestaldt Management Consultants, says the survey showed a significant increase in the number of people who responded that they “always” feel tired. One manager noted that when he asked his team how they felt before starting a meeting he was met with grunts and complaints about feeling exhausted and deflated. Being unable to energise them left him feeling helpless. “Single parents and single women experienced it worse because their lifestyles changed dramatically. They became slaves to laptops,” says Mahlangu.

Renata Schoeman Psychiatrist in private practice and head of MBA in Healthcare Leadership at the University Stellenbosch Business School

Thapelo Mahlangu Managing director of Gestaldt Management Consultants

The previous biggest stress people encountered was daily commuting and dealing with traffic. Suddenly, they were being faced with technological challenges and a complete lack of boundaries between work life and private life. Many also wanted to prove that they were productive and started pushing longer hours. “When this overcompensation started to become a habit, we saw more and more organisations ignoring the boundaries,” says Schoeman. Many people also felt they were working harder but achieving less. Du Toit says a senior manager acknowledged to his team that he had not been “himself” in the past two months. He asked them to rate him on a scale of one to ten in terms of the mistakes he had been making. He rated himself nine out of ten three months ago and seven out of ten recently. His team rated him nine out of ten three months ago, and three out of ten now. “People who are burnt out just do not have the energy to check and double check,” says Du Toit. It is generally the family who first notice signs of burnout. “The person can kind of keep it together at work, but at home the wheels come off.” Mahlangu says their survey did not show an increase in people taking medication to deal with anxiety or depression. “What we learnt was that a lot of people were working with a ‘good bottle of wine’ close to them.” The survey also did not show an increase in people requesting counselling. “What we are hearing, besides the wine, is that people are reconsidering their www.fin24.com/finweek

on the money quiz & crossword

phenomenon’

being, which has implications for employers.

WHO IS THE MOST LIKELY TO BURN OUT?

• High-performance-driven • Perfectionistic • Hard-working • High need for recognition • Unrealistic expectations SOURCE: Danie du Toit, registered industrial psychologist.

PRACTICAL ADVICE:

• Find ways to be more active, even if you are only pacing while on a call. One participant in the Gestaldt survey said her steps decreased from 5 000 a day to 470 while working from home. • Remove work emails from your private cellphone. • Block your calendar out during lunchtime and after 17:00 in the afternoon. • Mute WhatsApp groups at the end of the working day. • Shut the laptop down and lock it away. This is psychologically saying: “I am done.” SOURCE: Thapelo Mahlangu, managing director at Gestaldt Management Consultants.

careers. This time has hit them so hard that they have discovered that they do not actually love what they do and that they need a change,” says Mahlangu. Du Toit’s biggest concern at this stage is the level of anxiety most South Africans are experiencing. “We are permanently in a state of readiness. It is like running the 100m Olympics, waiting for the gun to go off to start the race, but the gun never goes off.” Stress and anxiety are now intertwined. People stress about the day-to-day issues, but there is also increased anxiety about the future. “Unlike in the past, the anxiety is now sort of justified,” he says.

Test your general knowledge with the first quiz of October, which will be available online via fin24.com/finweek from 5 October. 1. The Competition Tribunal has approved the sale of Jet Stores to which giant retailer?

■ Mr Price Group ■ TFG ■ Pepkor

4. ■ ■ ■

6. True or False? AstraZeneca is conducting Covid-19 vaccine trials in South Africa.

7. What is the title of the song by South African DJ and record producer Master KG, featuring vocalist Nomcebo Zikode, that has become True or False? Airbus is discontinuing the a global phenomenon with more than 150m manufacture of the A380, the world’s largest YouTube views? passenger plane. 8. True or False? South Africa has allowed travel In March 2020, the former Chinese from all of Africa from 1 October. ambassador to South Africa, Lin Songtian, was recalled to Beijing. Who is the new 9. On 17 September, the South African Reserve Chinese ambassador to South Africa? Bank’s Monetary Policy Committee voted to keep the repo rate on hold at 3.5%. This is the owner of Burger King leaves the total rate cut in 2020 at: in South Africa. ■ 300 basis points Pioneer Foods ■ 325 basis points Famous Brands ■ 350 basis points Grand Parade Investments 10. True or False? Jan Smuts was the first prime Name the minister of social development. minister of South Africa.

CRYPTIC CROSSWORD

ACROSS 1 Wrongly addressed, half-cut wife ran (11) 9 Timing’s right and the companion’s not bad either! (5,2) 10 Poor performer has no time for teacher (5) 11 Tribe in charge back in early England (5) 12 Hits French joiner with a punch (4,3) 13 Jamaican criminal could be familiar to Met officer (6) 15 Feature ballad about cheeky youngster (4,2) 18 Getting a ticket (7) 20 Total beginner ventures into the unknown showing inner cool (5) 22 Fool around with gunpowder compound (5) 23 Off-putting affliction (3,4) 24 The switch around involved a heated argument (11)

NO 762 JD

DOWN 2 First to have 50% leaf fibre (5) 3 Welshman and Sikh sporting African shirt (7) 4 Nark Joe to do the gardening (6) 5 Royal canine organisation in Channel Islands (5) 6 Diplomats shame losing a luxury car on last day (7) 7 Newspaper run? (1,5,5) 8 Seek firearm instructor’s approval? (3,2,6) 14 Shortly remember seeing it in a catalogue (7) 16 Gentleman makes a point at last (7) 17 Numerical fact is constant when first extracted (6) 19 I’m with Frenchman’s girl (5) 21 Money man borrowed from shark (5)

Treatment and recovery

Schoeman says by the time a patient has burnout symptoms, they fulfil the criteria for depression, an adjustment disorder or depressed mood, or an anxiety disorder. It should be treated as such by either a general practitioner and psychologist or by a psychiatrist who can prescribe the correct medication and therapy if needed. “Just to book someone off to take a rest is not addressing burnout at all.” It is rare that people need to be hospitalised, but she encourages people to see a psychiatrist for a proper treatment plan. It would entail a session to see if someone needs medication. The most common medication would be a selective serotonin reuptake inhibitor or antidepressant, which can alleviate symptoms in a week or two. The person may also need medication for sleep or anxiety in the short term. It is crucial to get therapy that will give the person coping skills to deal with the situation that caused burnout and for better stress management, Schoeman advises. ■ editorial@finweek.co.za @finweek

finweek

Solution to Crossword NO 761JD ACROSS: 1 See 17; 8 Ado; 9 Lamentation; 11 Salvage; 12 Somme; 13 No dope; 15 Closet; 17 & 1 Rocky Mountains; 18 Utopian; 20 Inheritance; 22 Ago; 23 Candlelit

DOWN: 2 Oka; 3 Tinea; 4 Images; 5 Scissel; 6 Manumission;7 Moth-eaten; 10 Malediction; 11 Senoritas; 14 Psychic; 16 Fun run; 19 Octal; 21 Chi

finweekmagazine

finweek 8 October 2020

Piker

On margin The Covid daze

Today’s isiZulu word is ibanga. Ibanga is a level/grade/standard/distance. I will always remember 2020 as the year, when, as a 42-year-old man, I failed ibanga R, ibanga 3 and ibanga 10. Yup, you guessed it – homeschooling. Now I am busy failing ibanga 1 of lockdown because I have no idea how to behave. The only comfort for me is that I am not the only one failing. All South Africans are failing. This is a bad thing because Covid-19 is still a reality and is still a real threat to the vulnerable. We have a long way to go before we can comfortably live our full lives. We have to do better. You might also encounter the word ibanga in a different context, where it means “it causes” – as in i-coronavirus ibanga i-Covid-19, and i-Covid-19 ibanga i-lockdown – i-lockdown has amabanga* that cause i-stress for you and abangani bakho**. Are you confused enough yet? IsiZulu has many homonyms that can banga you stress if you do not fully grasp them, but they are

not as confusing as amabanga of the lockdown levels. In fact, what happened to ibanga 3 of the lockdown being unconstitutional? And if ibanga 3 was unconstitutional and illegal, were amabanga 4 and 5 more illegal? Is the government going to set up another commission of inquiry to look into this? I think so. *Amabanga is the plural of ibanga as level/grade/standard/distance, but not the plural of ibanga as “it causes”. The plural that speaks of things that cause you stress is zibanga or abanga. People who cause you stress, like me with this piece, is babanga. **Abangani is friends. The singular is um’ngani. However, abangani can also be a question, as in “abangani amabanga we-lockdown?”, which is “what do the lockdown levels cause?” But wait, that’s not all – abangani can also be “what are they fighting over?”. I honestly hope I have confused you as much as the lockdown amabanga have confused me. – Melusi’s #everydayzulu by Melusi Tshabalala

Verbatim

Jack Appleby @JuiceboxCA Googling symptoms only tells you which diseases have the best SEO. Michael Saylor @michael_saylor No one can buy a pizza with their stocks, bonds, real estate, gold, or derivatives. No one cares. #Bitcoin does not need to be a medium of exchange. Zlatan Ibrahimović @Ibra_official I tested negative for Covid yesterday and positive today. No symptoms whatsoever. Covid had the courage to challenge me. Bad idea. Zerohedge @zerohedge Dear fraud CEOs: Going forward, please announce your “surprise” resignations on Friday evening, not on Monday just before stocks open. The Dad @thedad I told my son we couldn’t afford something, and he asked why I didn’t have more money, and I wanted to be like, “You, dude. You are entirely the reason I don’t have more money.” Chester Missing @chestermissing The government developed an app that can contact trace coronavirus. Now we need one that can contact trace Bosasa. Pierre de Vos @pierredevos What I have learnt from watching the Zondo Commission is that one should never get involved in corruption. It causes severe amnesia.

“Real change, enduring change, happens one step at a time.” — Ruth Bader Ginsburg, associate justice of the Supreme Court of the US (1933 – 2020)

finweek 8 October 2020

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