Property Flash


Liberty Two Degrees (L2D)’s financial director, José Snyders, says South Africans, especially the well-heeled, need to react to failing municipalities and poor service delivery across the country. Administrative crises and an education system which issn’t getting impressive results, are making the lives of the working and middle classes ever harder.

“It has become very frustrating to run any business in South Africa. We just haven’t seen the improvements that our government promised. It makes raising capital very difficult locally and from overseas sources,” he said in an interview with Property Flash about how L2D was preparing itself for a pending global recession.

L2D co-owns retail property assets such as Nelson Mandela Square, Sandton City, Eastgate, Melrose Arch, Liberty Promenade Shopping Centre and Botshabelo Mall.

Snyders said there needed to be a collective response from SA’s people, especially those who had agency and capacity and could make a difference. He said domestic issues were probably more concerning than a global economic recession for a larger portion of people.

“SA is a developing country and there are economic aspects about our economy which differ from other countries. Our economic outlook is for relatively low interest rate hikes even if our inflation numbers are similar to those of other countries. Overall, I think interest rates will go up but not as much as they will abroad. But my personal concern is not economic cycles but rather that over the past 20 years, we’ve gone backwards in terms of using resources. Our productivity has really suffered and you need productivity to grow an economy and create employment opportunities,” Snyders said.

As much as two thirds of municipalities couldn’t get clean audits and Treasury wanted to place a large portion of them in administration, Snyders explained. These problems were highly concerning for listed property companies and South African businesses overall.

“Of course a global recession is worrying but that is more for the wealthy who have investments pegged to certain things, which can be affected. The impact on the average South African will be different, and for them, their challenges are exacerbated by bad management of our cities and shocking service delivery,” Snyders said.

L2D has battled with inefficient municipal systems since it listed on the main board of the JSE in 2016. It has been in a valuation fight about Sandton City, of which it owns 25%, for four years, for example. The municipality says Sandton is undervalued and should be revalued at hundreds of millions of rand higher, which will enable it to collect higher rates.

L2D recently sold an office building and had to wait four months to get rates clearance, highlighting the inefficiencies of municipalities.

Snyders said it isn’t enough to rely on others to manage your infrastructure because they’ll fail to come to the party.

“As landlords, we have got to take collective responsibility for ailing infrastructure around our properties. There has been nothing but the decimation of property values in the past five years. No landlord has been spared,” he said.

The tax burden of being a landlord is also increasing at an alarming rate. Companies are unable to stomach rate raises of 10% or more.

Property companies are finding that municipal costs are a huge portion of their cost base and these are rising more quickly than other expenses.

Going forward, L2D and other landlords are focused on becoming less reliant on the state. Only about 30% of a landlord’s portfolio costs need not be reliant on the state, explained Snyders.

“Until there are notable changes in local government delivery, it’s difficult to see how things will change and how to attract people to invest in our economy,” he said.

It was unlikely for there to be the same appetite for SA’s listed property sector as there was five years ago.

“If we look a decade into the future, I can’t see us enjoying the same boom period in terms of capital investment that we did a few years ago. We underestimate the impact of international capital flows. It’s impossible to raise capital in SA’s current market environment. Speaking for L2D, our property values are down 20% and our market cap is down 40%. It’s important to note that property funds now get their money primarily from pension funds and not from other sources. As an industry, we need to speak honestly about these issues,” Snyders said.

L2D’s balance sheet was however healthy with its loan-to-value (LTV) at 24.6%. LTV is used to indicate the strength of a balance sheet. It measures the company’s debt relative to the value of its assets. Fund managers advocate that LTVs should not exceed 40% as a prudent ceiling.

Snyders said L2D’s LTV would fall to about 23.5% in the next few months following small asset sales including those of non-core offices.

Botshabelo Mall, located in the Free State, had been on a strong growth trajectory but would eventually be sold. L2D also wanted to sell its hospital in Richards Bay as this was non-core to its portfolio.

Currently, L2D wasn’t hunting in the market for new assets and it was better for the group to manage its existing portfolio.

“We haven’t seen really well-priced assets recently and don’t want to buy for the sake of buying. We could buy a substantial asset given our debt position. Right now, it makes sense to run our own assets,” said Snyders.

He said L2D and other landlords meanwhile needed to get used to being able to change quickly, be it through changing strategy or how they managed their assets. This need to be flexible was crystallised by the pandemic and now the war in Ukraine.

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