Vunani Property Investment Fund: Capitalising on the office space

Whilst the construction boom in South Africa might have hit the buffers in 2008, property prices continued to offer great investment opportunities. So much so, that Vunani Property Investment Fund (VPIF) had a meteoric rise from humble property investor to publicly-listed business in just 5 years.

The business was formed in 2006, as part of the Vunani Properties business, which was founded in 2004. The parent company had two main areas of interest: property investment and the development of offices, residential, retail and industrial properties.

“VPIF handled the investment side and over time began to build up a portfolio to the extent that we thought we could succeed autonomously,” recalls Rob Kane, CEO of VPIF.

Today we operate an income fund and distribute all income twice yearly to our unit holders. Our focus has been on office parks and offices in the major metropole areas of South Africa,” he continues.

One of the main reasons for our success has been in identifying the right type of property that offers value and growth potential; we have a focus on office buildings valued around R50 million or more that are A-grade.

We will purchase the building, upgrade it, and then re-tenant it, so we may not always look at the trophy asset, rather the building next door, that has the potential for improvement,” Kane explains.

Our acquisition criteria is very rigid and the main thing is if we believe we can buy value. In the past we have purchased a few rather ugly looking properties and turned them around completely, enhancing the asset value.”

It is a strategy that has worked phenomenally well; from humble beginnings in 2006, the company has enjoyed a total 34 per cent compound growth per annum since inception and Kane says that the property sector has performed particularly well during this period.

Another important aspect has been that all of our directors hail from a development background, which has played a big role in the development stage of each property we acquire.

In August 2011, our portfolio had grown to R940 million of assets and we are currently busy with further acquisitions that will increase the value to R1.75 billion by early September.

The decision to list on the Johannesburg Stock Exchange in August 2011, took VPIF’s potential for growth to a new level, as Kane remembers:

“It was a complete game changer for us. We needed to raise R320 million and we were given R622 million – there was so much support in the sector. That allowed us much more freedom to make acquisitions.”

Despite the sheer financial volumes involved, Kane says that VPIF runs “a tight ship” with just 5 members of the core management team. Most aspects of the business are outsourced to tried and trusted suppliers, responsible for property management, maintenance, cleaning and security and it is an approach that has delivered benefits:

Our portfolio of properties is spread across many of South Africa’s provinces and we prefer to employ the best people in each region to carry out essential work. This means that tenants get the best services but it also frees up our management team to focus on our strategy and make the right decisions,” says Kane.

Most of the suppliers have worked with us for many years and we have forged strong relationships,” he continues. “Our procurement policy also ties-in with our approach to Black Economic Empowerment and company is a 60 per cent BEE-owned business.”

The economic conditions over the past 5 years have been turbulent to say the least; however VPIF has enjoyed “extraordinary growth” over the same period of time, with Kane quick to point out that property prices remained high whilst interest rates were relatively low.

“Properties have performed well,” he confirms; “over the last 5 years where else could you have put your money for such a healthy return?”

The concentration on a niche area like office developments has paid handsome rewards for VPIF. The thinking behind this approach was that it was a tried and tested sector for Kane and his team and their office development experience gave the business every opportunity to acquire underperforming buildings, spend a little money on upgrades and then realise great returns.

Another factor at the time was that as we grew our portfolio we simply couldn’t find value in industrial buildings so we stayed out of that market. At the same time we didn’t have the expertise for large retail centres, so we focussed on office space, although we may consider opportunities in other sectors at some point, provided we are comfortable we can manage the asset” Kane explains.

We are very fussy about what and where we buy properties and similarly who the prospective tenants are. Approximately 80 per cent of our tenants are national companies and the average lease expiry agreement is 5 years. Our tenant retention is at 95 per cent. Everything we put together is done to create a long-term, stable income stream.

We undertake very little marketing and many tenants choose our properties as the buildings are in appropriate locations, with street frontage, often on main roads. Most tenants do their homework and find that they get a good deal from us,” he adds.

Another important industry trend that VPIF has embraced is the increasing influence of green developments. In 2012 the company won an Energy Efficiency Forum award for its work on a listed building in Cape Town, known as 14 Loop Street, which was originally constructed in 1904.

“In 2009 we renovated the building on green principles and the result has been remarkable water and energy savings for the tenants,” Kane enthuses. “The energy savings have been audited and demonstrated 66 per cent power savings, while rain water is captured off the roof and re-used. The only water in use that has been supplied by the municipality is to make tea and coffee and that accounts for just 4 per cent of the water usage.

“We are now looking to introduce energy and water savings across our national portfolio, which will benefit tenants.”

Of course utility costs continue to escalate and are a source of frustration for Kane as they cannot be controlled. At the same time he says that the sluggish global economy has given prospective tenants a sense of caution before agreeing leases.

However those concerns have failed to halt the irresistible climb of VPIF which Kane believes is sustainable for the long-term:

“Our team all works hard and has a lot of fun and sees the rewards of our efforts. Our challenge is to do that into the future and to build a strong business. Every decision we make is long-term and not quick-fire and that shows in our portfolio.

“We will always be a South African business and there are more than enough opportunities for us to continue to grow at home,” he states.