Keeping Entrepreneurial Flair in Growing Young Fund

ASSETMAG

spear-properties-ownersThe property sector has seen some consolidation and revisiting of strategies among many of the major listed property funds and owners in recent years, but this has also opened up opportunities for other players to enter the market and make use of the gaps that this has created. One such company is Spear Properties, a private equity real estate investment company that specialises in Western Cape properties.

Quintin Rossi, Spear’s managing director, spoke to Asset Magazine about the company. He, Mike Flax and Abu Varachhia founded Spear Properties in 2011 when the opportunity arose to acquire a portfolio of properties from Redefine. Owing to a change in portfolio strategy, Redefine was disposing of properties valued at under R50 million. Spear Properties saw a good opportunity to structure a buy-out of certain trading assets within that bundle, along with a portfolio of investment properties within the Western Cape, which included prime assets such as the Upper Eastside Hotel and office complex in Woodstock, and a 50% share of the Oasis Retirement Resort in Century City (the latter has subsequently been sold to Rabie Property Group).

The current portfolio of properties was recently valued at around R727 million and is about 93,000m2 in size. This includes two new acquisitions, one of which is the Distell distribution centre in Parow Industria, Cape Town.

The partners in the business all have solid experience in the property industry, and have between 10 and 30 years’ experience each in aspects such as property investment, finance, development and asset management. The team likes to take a hands-on approach and every aspect of the business (including the asset management) is administered internally, with the exception of the property management function which it outsourced to Swish Properties.

When deciding to invest in a property, there are a number of factors that the team considers. These include the initial return, the condition of the asset, the potential to increase income on the asset as well as the longer term value that the property, position and tenant hold for the business. “We are currently acquiring assets in line with our business strategy by investing in large industrial warehouses across the Western Cape, as we have recognised a demand by tenants for these types of properties,” comments Quintin. One of the company’s recent acquisitions is the 14,000m2 Distell Distribution Centre in Parow Industria, Cape Town.

In general, the strategy is to focus on properties in the Western Cape, particularly when it comes to multi-tenanted properties. “We like to keep our fingers on the pulse of the business, and we believe that one of the most successful strategies for retaining tenants is to be where your properties are,” Quintin explains. He says that while the company will look at large, single-tenanted properties in other established investement nodes such as Gauteng and KZN occasionally as such properties are easier to manage. Keeping largely to the Western Cape makes sense in terms of business agility, though. “Our entire management structure is based in the same building in Cape Town, which allows for a quick turnaround when it comes to negotiating and drafting leases, facilitating repairs and maintenance, etc,” he adds.
With the team’s experience and entrepreneurial spirit, they do occasionally develop or redevelop properties to add to the portfolio. “However, the initial return needs to be significantly higher – probably by about three to four percent – than a pure investment acquisition because of the additional risk,” Quintin points out. It is certainly a viable means of increasing the property portfolio without overpaying, though, and Spear does have a couple of properties earmarked in Paarden Eiland and the CBD of Cape Town for redevelopment in the next few years but this will be driven by tenant demand.

In this tough economic climate, it is important to find ways of being competitive. “We strive to be available and approachable to our tenants and to deliver on our undertakings as landlords as best we can,” Quintin notes. “We look at each tenant request on its merits and take the necessary decisive action as needs dictate.” He adds that Spear Properties is able to tailor each tenant’s leasing deal around their individual needs, thereby setting the stage for a long term, sustainable relationship. “We’re not just in the business of keeping tenants for the initial period of their leases – we want to keep them for as long as possible and we do that by creating long term relationships which translate into longer occupancies,” he says.

One of the foundations on which Spear Properties runs its business is that as Spear grows, the partners want their tenants to grow along with them. As tenants’ needs change, and as their companies grow, so Spear would like to be able to keep providing good business premises for those tenants in a way that accommodates their changing needs. Maintaining a hands-on attitude to managing the buildings is also important to this, as tenants spend each and every day in their premises and get frustrated by absent landlords who don’t fix things. “We make a policy of visiting all our buildings every week,” says Quintin.

The strategy for the business going forward is twofold. Firstly, it aims to achieve organic growth by pursuing yield enhancing properties and the development or redevelopment of properties in the Western Cape. The focus at the moment is mainly on larger industrial properties. Spear Properties is also investigating opportunities to acquire properties in Australia. Given the favourable lending rates there, the strong tenant covenants, the favourbale tax treaty between Australia and SA, and the fact that the Australian dollar is an excellent rand hedge at the moment, there is promise in this market for SA investors. Whether at home or abroad, Quintin says that current plans are to continue along the current trajectory for the time being with as much certainty as possible, and to continue with the strict due diligence process carried out on all properties before buying. Rather than being under pressure to acquire assets, Spear Properties will evaluate each opportunity carefully and intends to maintain a quality portfolio of stable, yield-enhancing assets in this way.