Johannesburg — COMMERCIAL property developers are starting to build up their own property portfolios, seeing value in holding on to properties instead of selling them in advance to reduce risk.

This is just one of the changes in a commercial property sector that has come of age in the past three or four years.

In recent years, the market has also seen consolidation in the listed property sector through corporate action, resulting in the emergence of several large listed property companies with market capitalisations of more than R4bn.

Four years ago a large listed property company or fund was one with a market capitalisation of about R2bn. Now R2bn companies are considered mid-sized to small.

Property companies and funds have also seen the value of investing offshore, with several doing this.

There has also been interest from foreigners in the local commercial property market, both listed and unlisted.

Andre Stadler, MD of Catalyst Fund Managers, confirms that developers are "starting to build" their own property portfolios of assets. "Instead of 'de-risking' the business by on-selling up front, they are holding on until completion, obviously to achieve better on-sale prices," says Stadler.

"It's a different strategy. They are prepared to take more of a risk and hold on to assets until completion."

This trend is driven by strong commercial property fundamentals.

Stadler expects a lot more "global influence" on the listed property sector, both from South African funds investing offshore and foreign funds investing in listed property.

But there may not be much further consolidation in the listed property sector.

"There are not too many small-cap funds that are still potential targets. We may see consolidation of much larger funds," says Stadler.

Des de Beer, MD of listed property loan stock company Resilient Property Income Fund, says developers are holding on to properties "because we are expecting good capital growth and income growth for the next few years. And the developers see this as well."

But De Beer says there are two constraints on those developers who hold on to their properties, one being that they have to recycle capital to have equity for the next development.

"Also, with interest rates where they are and the lower yields being achieved on some completed developments, they (developers) are under pressure to service the interest costs from the rentals."

The solution, which seems to be increasingly popular, is for developers to enter into joint ventures with listed property funds, says De Beer.

An example is Resilient's establishment of joint ventures with the developer Improvon.

Listed property loan stock company Pangbourne Properties has also established a joint venture with Edge Properties, which has resulted in the formation of Enigma, a property fund to hold completed property developments.

De Beer says the first prize for listed property companies and funds is to own properties "outright".

"But if you want to access new quality developments, the joint venture route is going to be more common in future."

As far as foreign influence in the local commercial property market is concerned, De Beer says that other than buying into listed property stocks, he does not see foreign investors adding any value.

He says there are a number of foreign players looking to build direct property holdings in SA, but they have not been very successful.

"Relationships are important in the local market and we don't have problems raising capital.

"Their (foreign investors) major contribution is to offer capital, but most of the listed (property) funds are not short on capital. We are looking for a value add, particularly in areas such as access to land and development skills."

He says there is "very little" that foreign players can contribute in these areas.

Keillen Ndlovu, listed property analyst at Stanlib, says that as far as distribution growth from the listed property sector is concerned, the "days of refinancing benefits, acquisitive growth either through takeovers or buying high-yielding properties, have gone".

"Given this, distribution growth will moderate but will still remain at the double-digit levels. We have entered a phase of organic growth where companies have to sweat their existing portfolios through cost control, extensions and refurbishments to maximise rentals, and ultimately distributions."

On the future of consolidation in the listed property sector, Ndlovu says there is "no more low-hanging fruit" and that if further consolidation happens, it will be more at a "senior and friendly" level between established property companies.

"Listed property continues to be driven by strong demand locally and offshore.

"With the speculation of being included in the global real estate index (Epra/Nareit) in the next year or so, South African listed property stocks stand a good rerating opportunity, given that our distribution growth and yields are relatively higher."