Ahead of the curve
VDMV Property Group currently has properties with a market value of R1 billion.
Writer Ian Armitage
Project manager Stuart Shirra
Industrial property is often-overlooked, traditionally considered 'dirty'. According to Fanie Botha, however, it is "the best inflation linked passive income generator to create long term wealth".
Mr Botha is part of the team at VDMV Property Group, a South African property company with a focus on the industrial market mainly in Cape Town and Johannesburg. The group is gaining momentum and was formed by Izak van der Merwe in 2003. It has, over the years, expanded into property management, leasing, sales, joint venture partnerships, turnkey contracts and project facilitation. In 2008, VDMV entered into a joint venture with Standard Bank Properties to procure 35 hectares of vacant land for development. The profits from this venture are being reinvested into a new R500 million development of 96 hectares – Brackengate Business Park. There is another R100 million portfolio in Johannesburg.
"It has been an interesting few years," says Botha, who came in to help take VDMV to the "next level". "Over the past five years, our strategy has been to structure and consolidate the business to an extent and we bought the parcel of land in 2008 to plan, service and develop it. We've just gotten out of the red with that. Now it is about what lies ahead."
Botha explains that the structure of industrial and commercial leases in South Africa is fairly unconventional compared with Europe and the U.S. In South Africa, most lease agreements include annual rental escalation clauses. Although rentals are relatively low by comparison, by raising rentals on an annual basis, you are able to compensate and increase the value of property assets due to the continually expanding income streams. VDMV has used this to great effect, he says.
Although the next peak in the South African property market might be a few years away, investors are seeing improvement in market conditions and VDMV is positive about the future.
"The timing and shape of the next upward cycle will be dictated by the performance of the macro economy, interest rate movements, commercial bank's ability to provide funding (Basel III) and the sector's ability to maintain a balance between the demand for and the supply of new developments," says Botha. "We have access to funds and have confidence in our capabilities and expect to achieve the best from the market. "The business strategy is to retain our focus on industrials and to grow the portfolio."
But the opportunities are tight. In the upper end of the market, over R50 million, the listed property funds dominate. In the lower end, under R10 million, you have a lot of owner-operators willing to pay a premium for the right location for their businesses. The mid-level is where VDMV sees opportunity. "Because we have the capability to stay near to our tenants, that's the market space we prefer to play in and where our returns are better," says Botha. "Our focus is on the middle market where the funds don't play and where the owner/operators don't play. It is a high yield area.
"The big growth funds have been major buyers of South African properties and the competition for available properties is immense. They have pushed up pricing to high levels where, with a traditional view, you have difficulty in seeing value in individual properties.
"We try to create our own pipeline of new properties. We've been developing our own stock. You can always be a follower but we try to be just ahead of the curve."
One of the secrets to the success of VDMV is its structure and focus. Decisions can be made quickly. "We make sure you get the decisions easy and you have to have good thought processes at the top," Botha says. "Being opportunistic, moving quickly and making quick top level decisions are vital. Yes, there is a background growth strategy and focus on Cape Town and Johannesburg and maybe one or two other centres and to constantly remain opportunistic to react to opportunities that present themselves at any time. A historic land owner in Cape Town, Cecil Morgan, once said, 'God makes more people but he doesn't make more land'. For Cape Town and all the coastal areas this is very true. The availability of land is limited. The price of land therefore has been pushed and pushed and pushed. If you develop, all the profit lies in the land value. There is no profit in the building. You can only profit from the building if you hold it for a term of ten or 15 years. You will get your money over time. If you want quick returns it is only on the land portion.
"As a business, we started small, buying up small parcels. Then, of course, we bought the 35 hectare parcel and developed Brackengate Business Park. Now we are looking forward and have just brought a new piece of land adjacent to Brackengate. There is not a lot of good located land available and we were very fortunate to acquire about 96 hectares of which a good 60 hectares can be developed. Our work stream for the next decade is laid out in terms of this piece of land. The important thing is that we try to build it up, making the community proud of having us there. We try to give it an identity. Give it a little twist. Make it a place to be. Give it an address. That is our strategy."
VDMV is creating a lot of attention.
"Our focus has been to grow where we are strong and that is in Cape Town," says Botha. "The new development will eventually be valued at about R600-700 million, maybe more – I'm being conservative – and then 80 percent of our portfolio will be Cape Town based; that will be in about five years from now. Due to the cost of new developments, we know that the pressure is building up for a major upward change in property rentals and that will benefit our current portfolios. In South Africa we expect an interest hike within the next two years, but that is world over."
Important themes for the future will be green building and there will be greater demand for "cubic metre" versus "square metre" developments, he concludes.
To learn more visit www.vdmv.co.za.