Futuregrowth: providing retail facilities to disadvantaged communities

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Futuregrowth Asset Management has not done enough to let South Africa know about the far reaching and high impact work it does in communities all around our country whilst still delivering competitive and sustainable returns to investors. Smital Rambhai, product manager of their Community Property Fund is passionate and engaged with the pervasive impact his fund has on under-serviced communities. This 20 year old fund has specifically focused on providing retail facilities to previously disadvantaged communities, especially in areas characterised by a lack of infrastructure and services. And in the process has created both short and long-term employment as well as being a springboard for ancillary and complementary industries to develop in the same areas. – Candice Paine

Hi, this is Candice Paine for Biznews and this special podcast is brought to you by Futuregrowth Asset Management. Today, we’re talking to Smital Rambhai. He is the Product Manager of the Community Property Fund. Now, we’ve been speaking to Futuregrowth over the last few weeks and the overarching message that comes through from all of their investments is that there’s a development and upliftment angle and the Community Property Fund is no different. Smital, tell us how does the Fund work?

The Fund is tailored for Pension Fund clients. We essentially, raise capital from Pension Funds and we then acquire properties in shopping centres specifically, in townships and rural areas. Every month, we generate nett rental income for our clients, so they get an income yield and we obviously look at the long-term capital appreciation of the property as an additional return. We often look at properties where there’s additional land which, should we have the capacity to expand, we can add additional value for our clients.

Why the township angle? Why are you looking there, in particular?

In terms of the township and rural space, when Futuregrowth started 20 years ago, it identified it as an area where it lacked development. We saw the opportunity and said ‘look, all of these people who live in the townships and rural areas, they’re travelling quite large distances, especially in the rural areas’. Some of them travel about 50 to 80 kilometres to get to a shopping centre. What we looked at was ‘what is the average Social Grant pay-out’. Your Pension Fund payout these days is about R1400.00 per month. If you have a child, it’s about R300.00 per month for Social Grants. If you take a taxi for 80 kilometres, you eat a lot of that Social Grant payout. By building these shopping centres closer to the communities, you’re actually increasing the disposable income of this community.

Does it mean that because these developments are in townships/rural areas, that there’s been a performance compromise in terms of what the Fund is actually, delivering to the investors?

Not at all. Actually, there’s a good investment case where, if you look at the township and rural space, a large amount of their spend goes into essentials such as food and clothing. If you look at the economic environment, even if we go through a bad economic slump, you have to eat and you have to dress, and that provides a long-term, stable return for the retailer and ourselves as the property owners.

There’s obviously related development around the shopping centres that you’ve set up…kind of spin-off industries that start. Does Futuregrowth have any say over or impact on what those are, or does the investment pay into your Fund at all?

I’ll use an example. In KwaZulu Natal, in KwaMashu we bought a shopping centre, which was called Bridge City Shopping Centre. We obviously don’t have the right to demand what developments come up around the shopping centre but before we go into the investment, we discuss matters with the various stakeholders who own the land. We try to identify what kind of services are going to be brought to that area, so Bridge City was interesting. The only reason why we bought into the shopping centre was since we knew there was going to be a Regional Magistrate’s Court, which is great for the area. There are great jobs and we knew that a hospital was coming as well, which is actually in the process of being built. I know that construction has commenced on the clinic so you know there’s going to be a clinic, hospital, Magistrate’s Court, and offices. We look at it holistically to ensure that there are feet. Just to top it off, there’s a railway station that stops right underneath the shopping centre, which provides a good transport node for the local community to the Durban CBD area.

Smital, what would qualify as a development shopping centre? For example, Sandton City’s not going to be in your portfolio. What are the criteria?

Our basic criteria is that we want to bring services to underserviced areas. For example, Sandton is already fully serviced (or over-serviced). We’ll therefore look at a region where there’s no transport/infrastructure, no access to Social Grant payouts, or medical services because some of our shopping centres have doctors’ rooms and dentists. Wherever there’s an underserviced area, we’ll identify the opportunity.

When I look at your portfolio, I see a glaring hole in the Western Cape. You’re very well represented in Gauteng and the Northern Province, but what is it about the Western Cape that has precluded you from having shopping centres there at the moment?

What you often find in the township spaces within the Western Cape… For example, Gugulethu already has a big development there – Gugulethu Square. There are other shopping centres in those areas. Firstly, but you need buy-in from the community and I think the Western Cape communities have been very resistant to any new developments happening. In addition, the opportunity to buy land in those township areas is very scarce because they’re very densified. I guess it’s a combination of getting land and getting buy-in from the community as well. We’re also reliant on a developer to start the process with the community because we don’t take development risks.

You specifically say that you haven’t had buy-in from the community. At some point, they must see the benefit of having these shopping centres right on their doorsteps.

Another factor that drives retail development is the retailer itself. The developer will speak to all the national retailers like Shoprite, Ackermans, etcetera and they will then see. Shoprite’s done their homework on where they want to be. If the major anchors don’t want to go into a certain area, there’s no point in doing development even if the community wants it, because you’re still reliant on demand from the retailer. We don’t want to disadvantage our investors by building a shopping centre in an area and no retailer wants to take up space.

It makes perfect sense. I want to talk a little bit around the Fund structure. We were speaking earlier around liquidity in the fund, what you actually do with the rental income, and how you would accommodate investors coming in or going out of the Fund.

The Fund generates nett rental income every month, which is quite a substantial amount. The rental income is always reinvested into the Fund. If there’s an investor who wants to exit… For example, maybe we’re generating R20m or R30m per month and the investor wants to disinvest R60m, we facilitate that payment over a two-month period. Should this investment be substantially larger, we may look to see a property as a last resort but we’ll never detriment our investors by selling off a building we feel has a lot of potential. We always sell a property where we feel we might not be able to add any more value.

What about the future of the Fund? You can only own a finite number of shopping centres within the borders of South Africa. How close are we to being saturated?

If you look metropolitan areas like Sandton and cities all over South Africa, there’s a shopping centre on every corner. If you go out to the township and rural areas. Those areas are quite dispersed so there are still opportunities in those rural and township areas. Getting a piece of land is difficult as well, so you are seeing less and less developments coming up. The Fund has an advantage in that it has existing shopping centres, which are rather anchored and well known. We do have expansion opportunities to grow those shopping centres because those areas have densified over many years. The other opportunities we’ve seen: other property managers, not really understanding the township and rural market. You have to be very engaging. You have to have meetings with the local chief at a tribal council meeting and I think many property managers don’t understand that. We see property as being mismanaged because they don’t understand the community. We can see there are opportunities to buy some.

I’ve been talking to Smital from Futuregrowth Asset Management, who continues to do far-reaching development and upliftment investing in our South African communities.

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