RADIO INTERVIEW on 102.7 - CLASSIC BUSINESS DAY

04/07/2006 - Kevin Homann is interviewed by Lindsay (Classic Business Day on 102.7)

Lindsay

SME – Small and Medium Enterprises, which are in office and industrial properties and want to expand their businesses, can escape much of the fallout from higher interest rates which we are starting to really see as a reality in South Africa. If they sell their buildings in Sale and Lease Back Agreements to raise expansion capital, what does that mean? It sounds a bit complicated for somebody like myself. On the line to enlighten me, is Kevin Homann from Spirit Capital. He is a Director there. Hello, Kevin …

Kevin Homann

Hi, Lindsay, how are you?

Lindsay

Very good, thanks. What do you mean by this? Can you put it into layman’s terms for me?

Kevin Homann

Sure. Lindsay, we believe that private properties generally form a substantial part of the capital base of private businesses and that, in the current interest environment, it might be an opportune time with interest rates about to pick up for the forecast of interest rates to take up for owners to consider the exposure to a property and if they have got other gross profiles or expansion opportunities to consider disposing of their property assets, and re-investing that capital in their business. But what that means is that they can sell their property but still retain the benefits of occupation by entering into a lease with the property purchaser.

Lindsay

So what’s the difference between actually just selling it outright and getting the cash if they think the property market has reached its peak and actually going into an agreement such as the one you have just suggested?

Kevin Homann

No, there is no difference. Sale and Lease Back is effectively a sale. You retain the rights to do … remain on the property and occupy it in the future and, in fact, you can secure additional rights in the sense that should the current or the new purchaser wish to dispose of the property asset within the next three years or five years, that you have a pre-emptive right to re-purchase the property from him once you’ve invested that capital in your business and you would like to re-purchase the property back from him. So there is no difference between a sale and essentially a sale and lease back.

Lindsay

So who is going to be on the other side of this transaction, typically?

Kevin Homann

Generally, the larger properties would be purchased by the Listed Property Funds and when we say larger properties, probably R10 million in value and higher, and the smaller properties you will get … there is a myriad of individual purchasers who would be interested to purchase and I think property values are determined by the market. So if listed companies are interested, they’ll … they’ll definitely have a go and private investors will always come sniffing.

Lindsay

A Listed Property Market obviously looking to expand its portfolio because of the huge demand there has been from institutional investors and also overseas investors, so they will be quite keen to enter into this type of transaction?

Kevin Homann

Correct. Correct. A Listed Property Market has had a fantastic run, both in terms of capital available to it and also in terms of the value of the assets that they have under management, so … there is a … there is a demand for quality property assets out there, and there is probably a shortage of good stock for the Listed Funds. So they are definitely a good source for those guys to look at in terms of either one to sell to, and we think it is a good time to sell because the Funds are quite keen on getting reasonable assets.

Lindsay

Do you think there are a lot of SME’s out there that actually do have their own properties? I mean … by nature … by the nature of their business, the small and medium size, so how would they have acquired a property in the first place?

Kevin Homann

Yes, SME business generally could be in the valuation range of R10 million to R20 or R30 or R50 million, but our experience is that most businesses generally do own the properties from which they operate. And that it forms a substantial part of the equity owned by the shareholders or by the business itself. So it’s in our experience, it is exactly that … that the properties are owned by the business owners themselves.

Lindsay

Then how prevalent is this practice at the moment?

Kevin Homann

There has been a trend towards it. Obviously in the last couple of years where property values have increased dramatically … the sellers were probably holding back and just going along for the ride. Man … we have seen one or two transactions recently, of NBI type transactions where the business or the management team purchase business operations but don’t necessarily need to own the property assets and the property asset is acquired but then on-sold to the Listed Funds. It just assists the businesses in staying focused on operational issues rather than owning a property, which you could leave for someone else.

Lindsay

You are talking about the advantages a lot and I can understand that. It is your business to do so. There must be some downside though Kevin?

Kevin Homann

Sure, the property is a good asset over the long run. We just think that given the dramatic increase in property values over the last two/three years, that the gross in future values is going to slow down dramatically. So if you have got existing opportunities for growth, or even divesting and you want to take some money off the table and put it in other asset classes that you think will out-perform property, now is a good time to do so. But property in the long run has always been a good asset. So it is not … it is not a question of being … you should sell rather than … you should consider whether you have got other opportunities that make it worthwhile for you selling.

Lindsay

Kevin, it is interesting stuff. Thanks very much for your time this evening. That was Kevin Homann who is a Director of Spirit Capital. You are listening to Classic Business Day on 102.7.

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