Funds Management

Overview

In 2015, as Growthpoint Properties increased its offshore investments to become an increasingly international property company, it also identified new opportunities in the business models followed by other leading international property companies.

Funds Management was one such opportunity and it enabled Growthpoint to access alternative investment opportunities and leverage its management strength in the unlisted and co-invested environment, where there is a differentiation from the company's core business. It was a fortuitous and well-timed move which we believe will prove to be a key area of growth in future.

Growthpoint's Funds Management model is premised on an efficient use of capital where it raises third-party funding for up to 80% of the capital in each fund and introduces gearing of approximately 40%. Growthpoint invests between 15% and 20% of the capital in each of the funds from which it earns distributions. Added to this, an asset management fee is paid on all assets owned by the fund, based on gross or net asset value, and it also earns property management fees from some funds.

Key criteria for establishing a specific fund include the potential to scale the opportunity and that its assets must be differentiated from Growthpoint's core South African portfolio investments in the office, retail and industrial property sectors. The intention is to create funds in niche asset classes which are scalable enough to attract institutional investor support.

The introduction of Growthpoint's Funds Management strategy has added depth to the real estate market for the broader investment community because SA REITs focus mainly on the three traditional property asset classes: office, retail and industrial. The undertaking has also allowed Growthpoint to further diversify its assets and harness opportunities to create sustainable value for its stakeholders.

Its first fund, GIAP, was launched in 2018, followed by the healthcare fund later the same year. Both responded to the capital available in the market and received keen interest from investors. Each fund will remain unlisted until reaching a meaningful size, in order to make an eventual public listing worthwhile.

Despite a slow start from a zero base, Growthpoint's Funds Management platform has gained strong momentum over the past year and now has around R13.7bn of assets under management. It is comfortably on track to meet its goal of having around R15bn of assets under management by 2023.

Performance

Growthpoint remains focused on building its first two funds to increase their size while creating new income streams from property. Backed by the management team, whose entrepreneurial vision and skills have made Growthpoint a leading international property company, progress in growing the funds is gaining momentum. The model of co-investment and co-management is proving effective and Growthpoint will continue to pursue innovative partnerships and ways of investing.

Prospects

Growthpoint remains committed to initiating other funds and expects to launch another in FY21. In addition, we still believe there are opportunities to be found in property classes such as student accommodation, education and retirement living. The timing of the launch of any new fund will be opportunity driven.

Growthpoint Investec African Properties (GIAP) as at 31 March 2020

  Differentiator   Geography  
  Manager   Growthpoint Investec African Property Management (50/50 JV) MD: Thomas Reilly  
  Assets under management   USD638m  
  Net asset value   USD301m  
  Growthpoint holding   16.6% (an investment of USD50m or R750m)  
  Gearing   41% LTV  
  Major co-investors   SA and foreign pension funds  
  Asset management fees   2% of NAV  
  Income streams for Growthpoint  
  • Property investment returns
  • Management company distributions
 

This year, GIAP built a quality portfolio of income-producing assets to attain a meaningful degree of scale and relevance and position itself as an emerging leader in the African real estate market.

The macro-economic headwinds faced by numerous countries across the African continent over the past few years, and particularly those involved in oil production, have caused rental levels in many markets to fall and asset prices to drop as a result. This has created highly attractive acquisition opportunities for GIAP.

With this as a backdrop, GIAP increased its investor numbers from six to 20, deployed its full equity raise and achieved significant growth. It successfully negotiated and concluded three significant transactions to end the year with 11 income-producing properties, eight of which are core.

GIAP also began an initiative to restructure the debt on its balance sheet in order to enhance the operational efficiency and returns of the business.

The diversified nature of GIAP across several jurisdictions and property sectors has proved valuable over this period, particularly in the light of the evolving nature of the Covid-19 pandemic. The countries in which GIAP is invested have all been impacted by Covid-19 at different times and all had different restrictions imposed by their governments.

Both Ghana and Nigeria imposed lockdowns in April 2020 that lasted between three and four weeks, during which time only services deemed essential were able to trade. After the lockdowns were relaxed towards the end of April, some semblance of normality returned to those markets. It is worth noting that Zambia did not impose any lockdown. GIAP's malls in Ghana and Nigeria are relatively small in their markets, and a disproportionately large component of their tenant bases provide "essential services". These include large anchor grocers, various telecoms operators and banks, all of which continued to trade. Thus, GIAP's assets are potentially better positioned to weather the storm than bigger competing properties.

GIAP's office assets, which make up most of the portfolio, also remained less affected by the pandemic. Many are tenanted by large international tenants, including large financial institutions, which remained mostly operational even though most either rotated office staff or allowed them to work remotely. Demand and enquiries for office space continued, resulting in successful leasing continuing even during the pandemic.

Continuing its momentum, a new equity raise is planned to grow and diversify GIAP. A follow-on transaction in Nigeria is in the process of being completed. Further growth and diversification of the fund will continue on a considered basis, with the aim of capitalising on the opportunities presented by a buyers' market.

Asset allocation

The GIAP investment strategy is centered on building a quality portfolio of prime, income-producing commercial assets in select cities across Africa. Investments are chosen to support long-term rental growth from top-tier tenants to generate sustainable investor returns.

82%   4.2 years   96%
Global and multinational tenants   Average lease expiry period   USD-denominated leases
Asset Location Sector Size (m2)   Description of tenancy
Achimota Retail Centre (97.5%) Accra, Ghana Retail 15 763   Anchored by Shoprite and Game
Junction Mall Accra, Ghana Retail 11 377   Key tenants: Shoprite and Decathlon
Stanbic Heights Accra, Ghana Office tower 20 126   Regional head office for large international corporates including Stanbic Bank, General Electric and Samsung
Accra Financial Centre Accra, Ghana Office tower 14 134   Head office for African Development Bank and First National Bank
Standard Chartered Building Accra, Ghana Office tower 12 235   Head office for Standard Chartered Bank
Manda Hill Shopping Centre Lusaka, Zambia Retail 40 762   Anchored by Shoprite, Game and Woolworths
Wings Office Complex Lagos, Nigeria Office 27 085   Multi-tenanted by several international tenants
Circle Mall Lagos, Nigeria Retail 13 870   Key tenants: Shoprite, PEP and Standard Chartered Bank

Geographical diversification by value (%)

 

Diversification by sector (%)

 

Tenants (%)

   

Deal flow

Developers of property across Africa are seeking ways to efficiently exit completed assets so that they can recycle and redeploy capital. This is providing deal flow for GIAP. Its investment capacity is expected to support the development of local African real estate markets and to contribute to the wide-ranging progressive impact which real estate can have in such markets.

Target

Liquidity for investors will be through a stock exchange listing, once the fund has USD750m in NAV.

FY20 contribution to Growthpoint

GIAP's first distribution to shareholders is expected to take place in FY21.

Growthpoint Healthcare Property Holdings (GHPH)

  Differentiator   Geography  
  Manager   Growthpoint Management Services Fund Manager: Dr Linda Sigaba  
  Assets under management   R2.62bn  
  Net asset value   R2.64bn  
  Growthpoint holding   61.8%  
  Gearing   1.7%  
  Major co-investors   Pension funds  
  Asset management fees   1.25% of GAV  
  Property management fees   1.5% of gross collections  
  Income streams for Growthpoint  
  • Property investment returns
  • Management company distributions
  • Property management fees
 

GHPH continued to demonstrate pleasing growth and good demand, based on the defensive nature of the healthcare sector. It successfully completed the 52-bed expansion of Busamed Hillcrest Private Hospital in January 2020.

The Fund's property portfolio continued to be curated to include a diversity of both healthcare properties and operators, who currently include Netcare, Busamed and Mediclinic. We are receiving enthusiastic interest from strong regional healthcare operators and remain in discussions with them. We continue to engage with the big-three national operators as we believe long-term opportunities can be unlocked with them.

In January, Kagiso Capital invested a further R288m in the Fund and it now owns 15% of the issued share capital.

GHPH is also negotiating with International Finance Corporation (IFC) the terms of its proposed investment in the Fund, and has signed an initial agreement with IFC for a R1.2bn (USD80m) equity and convertible debt package to finance the development and acquisition of properties for GHPH. We anticipate that this agreement will be finalised in the last quarter of 2020.

Healthcare and property are defensive asset classes that traditionally tend to perform well even during economic downturns. However, the unprecedented nature of the Covid-19 pandemic has had a devastating impact on the South African economy, not sparing any asset class, including the property and healthcare industries. As an initial response to the pandemic, a hard lockdown was imposed in March 2020 and all elective surgeries in South Africa were stopped to prepare the country's healthcare facilities for the expected surge in Covid-19 admissions. This had a severe impact on the tenants of the healthcare fund and on their ability to meet operating cost obligations as the number of theatre cases, occupancies and revenues dropped significantly. However, the industry expects surgical cases and occupancies to gradually increase as the country continues to move to lower lockdown levels over the coming months.

The pandemic also delayed the acquisition by GHPH of 51% of the 100-bed Busamed Paardevlei Private Hospital property in Somerset West, which will add another mature asset to our portfolio when the transaction proceeds in FY21, and extends the great relationship we have built with this innovative operator.

Construction of the Cintocare Head and Neck Private Hospital in Pretoria was delayed because of the Covid-19 lockdown and its opening has been rescheduled for January 2021. Even so, the specialised surgical hospital development by Growthpoint and Cintocare became the first healthcare property on the African continent to be awarded a 5-Star Green Design certification customised for healthcare by the GBCSA. We will be proud to take ownership of this clinical centre of excellence on its completion.

The first half of FY21 is certainly going to be difficult, but the duration and degree of the challenges are as yet unknown. Depending on progress in combating Covid-19, the number of elective surgeries performed could remain low and actually even decrease further.

In a market with liquidity constraints, GHPH is in the advantageous position of having capital to deploy, thanks to the IFC's upcoming investment, and will be seeking suitable assets to acquire. Greenfield developments are a riskier way of growing our portfolio and as such, we only consider growth through development hand-in-hand with strong tenants. Acquiring mature healthcare assets carries a lower risk and is preferable for our growth.

The fund also enjoys the benefit of having debt head room. That said, we remain on a capital raising trail and are engaging actively with pension funds, asset consultants, family offices, development finance institutions and fund managers to attract more investors to GHPH. Despite the impact of Covid-19 on the property and healthcare sectors, we remain bullish about expanding the fund.

The pandemic has highlighted critical gaps in South Africa's healthcare sector, and we believe we could play a role in closing them. An overcapacity of acute beds, especially low-acuity beds, has been revealed in some markets, specifically in the Durban, Pietermaritzburg, Johannesburg and Pretoria areas, and there is potential to develop specialist healthcare facilities in these regions. In other markets, there is a need for more private sector hospital beds and healthcare facilities. This applies to some regions of the Western and Eastern Cape, as well as the smaller provinces. Here, shortages apply to acute hospitals and day hospitals as well as laboratory facilities and pharmaceutical manufacturing, warehousing and logistics properties.

The fund has lined up a mix of acquisitions and development projects for completion in FY21.

Asset allocation

GHPH is the first unlisted healthcare fund to invest exclusively in healthcare property assets in South Africa. The investment mandate is to acquire and develop acute, day and specialist hospitals as well as laboratories and manufacturing and warehousing facilities.

Portfolio

GHPH has five healthcare assets, comprising four hospitals and one medical chamber building. The fund's assets are characterised by long leases, with hospitals and clinics generally being long-standing landmarks in their communities. Three of the hospitals have consistently been on Discovery Health's annual list of leading South African hospitals, as rated by their patients.

Our hospital assets are:

Deal flow

Many healthcare operators, particularly newer or smaller ones, are seeking to grow. This trend is expected to provide deal flow for the GHPH specialised investment vehicle. In the medium to long term, the creation of this healthcare-focused property company will provide established hospital operators with a credible platform on which to sell and lease back some of their property assets to manage their balance sheets more efficiently. This is consistent with models followed by hospital groups globally.

Target

Liquidity for investors will be through a stock exchange listing, which is anticipated once the Fund has R10bn in assets.

FY20 contribution to Growthpoint

Due to the negative effects of the pandemic, the dividends that Growthpoint received from GHPH in FY20 were lower than initially expected. The fund delivered DPS growth of 5.8% and DPS of 77.45 cents (FY19: 73.3 cents). With Kagiso's investment, Growthpoint's stake in GHPH also reduced, from 72.9% to 61.8%.