Market Watch: Profitable pipeline

MY INITIAL suspicions — aired some time ago in this magazine’s Fox section — that investment conglomerate Hosken Consolidated Investments (HCI) intends becoming a serious player in the property sector appear to be firming up.

In preparing for HCI’s AGM, I noticed the increased emphasis placed in the annual report on the company’s fledgling property interests. In truth, the property operations are hardly moving the needle at HCI. In the year to March, HCI Properties generated R81m in revenue and pretax profits of R70m — accounting, respectively, for 1% of group turnover and around 4% of group pretax profits.

But the growth in HCI’s property operations does catch the eye, remembering that in the 2013 financial year turnover was only R56m and pretax profits R33m. Admittedly, the significant portion of the property segment’s profit stemmed from the revaluation of the office block investment in Protea Place in Cape Town.

While HCI has for years tucked away its property interest held in Gallagher Estate (where development of vacant land is ongoing), the group’s real estate ambitions really caught fire about two years ago when involvement in two developments — the recently completed Kalahari Village Mall in Upington and soon-to-be-completed The Point (retail and office park) in Sea Point — were announced.

With the first two developments under its belt it seems there’s some momentum in HCI Properties. The annual report details the “Monte Circle” joint venture development with gaming subsidiary Tsogo and Abland as well as “Pivotal”, a mixed-use precinct in Fourways which is expected to break ground for the first phase later this year.

Then there’s another joint venture with Abland for the development of an industrial property in Modderfontein.

Significantly, HCI Properties has also acquired another industrial property in Congella, Durban with Donnelly Projects (its development partner), and bought the Lynnridge Mall from Emira Property with Retail Africa, its partner in the Kalahari Village Mall. Redevelopment of the 19 000m² Lynnridge Mall has started and is set for completion in September next year.

Having one major redevelopment project on the go has not stopped HCI Properties and Retail Africa kicking off another project in the form of Blue Hills, an 11 000m² convenience centre in Irene near Pretoria. Blue Hills is set for completion in mid-2015.

Judging by comments in the annual report, there is a considerable pipeline of other retail development deals under consideration with Retail Africa.

While retail and commercial development is clearly the focus, it is interesting to note that HCI Properties has purchased what it describes as the former offices of the Rand Daily Mail in the Johannesburg city centre (I’m guessing that’s the old Saan building in Main Street that some old journos might remember fondly … or not) for redevelopment as inner-city housing.

Currently HCI’s biggest exposure to property assets is through its 78% stake in media/industrial cluster Seardel. The value of the Seardel property portfolio is around R1bn, and the company generated revenue of R119m.

Much of that portfolio is let to Seardel’s operating subsidiaries, so it’s heartening to see the rental flows from external tenants increasing by over 50% to R72m (representing a chunky 60% of total property revenue).

Seardel’s operating profit before finance costs from its property segment increased 61% to R104m — albeit with R21m of upwards revaluation of investment properties. Sans revaluations, Seardel’s operating profit from property was up 26%.

With Seardel set to split its media and industrial assets — the latter falling into newly created Deneb Investments — what chance fast-growing HCI Properties might covet the property assets linked to external tenants? Quite conceivably HCI Properties, considering its development pipeline, might even consider a separate listing on the JSE’s real estate board sooner rather than later.

Source: Financial Mail