The firm sets its eyes on further expansion
If you want to get a seasoned commercial property dealer really excited, just throw the word Pareto into a conversation. This is because of the quality of assets housed in this 10-year-old retail-focused property fund.
Pareto, an unlisted property loan stock company, owns some of the most coveted properties in the country, which add to a total asset base of about R10bn. These include stakes in Johannesburg jewels like 100% of Cresta Shopping Centre, 25% of Sandton City, 67% of Southgate Mall and 56% of Westgate Regional Shopping Centre. Pareto also holds 58% of Tyger Valley Centre in Cape Town and 100% of The Pavilion Shopping Centre in Durban.
WHAT IT MEANS
Total asset base is about R10bn
Strategy is to grow it by R5bn
Owned 60% by the Eskom Pension & Provident Fund and 40% by the Public Investment Corp, Pareto is a giant that has flown under the radar. But the property fund is now making noises.
These noises include news that the EPPF is weighing its options, a decision that has drawn the attention of every savvy commercial property player in the country and beyond. From a management point of view, Pareto is approaching its second decade of existence with a braver strategy, backed by a plan to splash out about R5bn on growing the asset base in the next few years.
It is clear that the newish team at the helm has found its desired niche. This is a team put together by Alex Phakathi, who was appointed CEO in 2004. He says the low-key personality of Pareto for the past few years was largely by design. The group was focused on strengthening internal systems and consolidating the existing asset base. "We have done that successfully and are now in a good space to drive an outwardly focused strategy," he says.
Established with an asset base of R2,8bn in 1998, Pareto had grown to more than R4bn when Phakathi took over. He then oversaw growth in the asset base to about R10bn in the past four years. Total returns have been consistently above the benchmark - the Investment Property Databank (IPD) SA index.
Pareto's portfolio produced a total return of 34% last year compared with 27% produced by the IPD SA all property index. The more comparable IPD SA retail index was quoted at 26% last year.
Pareto chief financial officer Nomzamo Radebe does not expect performance to be significantly affected by the slowdown in retail spending. "The blue-chip assets that we have can withstand pressure even though the retail sector is said to be reaching maturity," she says.
If all goes according to plan, Pareto's portfolio is set to grow 50% to about R15bn in the next few years. As part of its recently declared plan to expand its asset base, Pareto announced in June this year the acquisition of Mimosa Mall in Bloemfontein. Expansive projects valued at more than R3,2bn are in the pipeline.
A measured strategy to diversify Pareto's exposure into industrial and office properties is being implemented. This entails investing in properties that offer an exposure to industrial and offices while retaining a retail focus.
The latter sectors were excluded from its mandate over the past 10 years, which may have frustrated its potential.
Its growth opportunities have also been widened by the dropping of the minimum size of retail properties to be held. Previously, it could only invest in large retail properties of no less than 50 000 m². The threshold has been reduced to 30 000 m².
Though Phakathi and his team are revelling in what they describe as the beginning of an exciting phase, observers are critical of the apparent inertia of the past few years. Critics point out that a lot of opportunities have been missed by an institution that always had powerful muscle to drive growth.
Such criticism may be valid but it overlooks two critical factors - the change of leadership and that Pareto has always been a cautious player, due to the nature of its shareholders.
Importantly, Pareto went through an extraordinary change of leadership. That transition began with the installation of Phakathi as CEO in 2004. Though he was no stranger to property, he needed time to settle in before stamping his authority.
He was armed with a master's degree in commerce when he came to Pareto. He lectured property finance on a part-time basis at Wits University for five years. He had also sharpened his property skills at Engen and Eskom. Being one of the first black executives to head a property giant, Phakathi came with zero cultural equity, which can make things difficult. Phakathi acknowledges this point. "Talk that the property industry operates in closed circles is no exaggeration," he says.
Despite those challenges, Phakathi has managed to transform Pareto into one of the most black economic empowerment (BEE) friendly entities in the country, with an executive team that is 100% black. The core of the team, described by Phakathi as young and dynamic, includes Radebe; acquisitions manager Osafo Gyimah; and Nozuko Mxunyelwa, who serves as legal & compliance manager as well as the company secretary.
"People always say these things cannot be done but we have proved otherwise," says Phakathi. "We are in a good space and should be able to fulfil our mandate and consolidate our leading position."
Pareto is in a unique position that enables it to take advantage of the prevailing market conditions. Many property investors are under pressure. Property yields have come under pressure, which means good assets can be picked at a bargain, if you have the cash.
"A number of factors have played in our favour," says Phakathi. As an unlisted property fund, Pareto can override the prevailing negative sentiment.
"We are not exposed to the vagaries of the market, which allows us to concentrate on real fundamentals when pursuing new investments," he says, in contrast to listed property funds, whose market caps have been hammered in the prevailing global crisis.
Another advantage is Pareto's gearing level. At about 4%, Pareto's gearing leaves much room for the group to engage its balance sheet to drive growth.
Phakathi also points to what he terms the relative agility of Pareto compared to its peers. Pareto's lean structure and relative independence gives it an advantage over other large institutional property investors who have to bear with heavy bureaucratic protocols. It has a staff complement of less than 20. The team focuses on asset management - other services are outsourced to third parties. "We are a small organisation and therefore are able to move much quicker than our competitors," says Gyimah.
Pareto's primary goal, says Radebe, is to create an investment asset base that provides sustainable long-term income growth for shareholders. Though Pareto insiders give an impression that everything is hunky-dory, recent developments at shareholder level must be unsettling. Management worries when there is a possible change of ownership of the asset they run. Whatever the future holds, history has been made in the past 10 years.
By Sibonelo Radebe, Financial Mail