SIMON BROWN: Simon Brown here, host of MoneywebNOW. I’m chatting with Justin Clarke, COO at OrbVest. Justin, I appreciate your time today. We are talking property – although obviously in OrbVest’s case it’s more syndication.
Let’s start at the top end. I suppose the first question that any investor would have is: Why commercial real estate as an investment point, anyway?
JUSTIN CLARKE: Yes. Hi, Simon, and great to be online again with you [talking about] commercial real estate. I think there are a couple of fundamentals that anybody who is in the commercial real estate space will tell you.
The first thing is that commercial real estate is based on the effective value of the future income of that building. It’s less about the emotive inputs. Anyone who’s bought a home will know that you are influenced by a couple of things. One is demand and supply; if you think you’re going to lose the house, you’re more likely to put in an offer.
The second thing is if your wife loves the kitchen there’s a chance you’ll pay a higher price. Of course, with commercial real estate it’s all based on future income. Generally there’s a mathematical calculation. It’s the income of the building and the cap [capitalisation] rate of the particular type of building in that area. It’s very defined.
The other thing that I like about it is it’s underpinned by hard assets. Ultimately if you are building or buying a commercial building, it’s going to cost more to build that building in a year’s time than it cost five years ago when it was effectively built in the first place.
So it’s underpinned by hard assets and you get this really nice inflation sort of ‘push’.
You’ve got that security as well – fundamental value of the building, as well as the valuation based on the tenant that you have in that building and what they’re prepared to pay you.
I guess for a lot of people online, Simon, it’s about residential versus commercial. The other thing with a residential property, for those people who buy-to-let, is you rely very, very heavily on short leases. With commercial generally your leases are much longer. Then of course your tenants are more likely to pay, because they are commercial enterprises that depend very much on being in that particular building.
I think those for me are really the main reasons why commercial real estate is just the thing.
SIMON BROWN: I like your point about leases because typically residential is going to be six, 12 months, and commercials probably start from three to five years to perhaps as much as 10 years. If we move to the ‘what’, commercial real estate, we’ve lumped it kind of together as one category. But truthfully within that there are multitudes of different types of commercial real estate. Can you touch on some of those different subcategories?
JUSTIN CLARKE: Yes, I think we generally call it residential or commercial whereas, in fact, commercial is broken into a number of different industries. It’s industrial, which you can understand – the bigger sort of factories or manufacturers. There’s retail: retail is your shopping mall. Hospitality is the hotels and I guess that goes as far as bed-and-breakfast and guest houses and things that that you would sell on an income basis.
There’s quite a lot involved there. I think in the US there are a lot of subcategories that are even bigger than our entire categories. So it’s probably a good idea if we get into those. Multi-family housing has been one of the favourites for investors and what that effectively is, is whole sectional type of complexes that will be owned by one particular institution, and you invest with that institution. That’s very different from single res, where you own the piece of property on your own, or sectional title where you own your piece of that multi-family housing complex.
And then there’s logistics. Simon, that’s been hot in the news. Everyone is looking for logistics; and of course medical real estate, which is the sector that we are hyper-focused on.
SIMON BROWN: Your hyper-focus is geographically located. If we step back, the world’s a large place and typically people have home-country bias and it’s the market, you know. It’s where your pension is going to be predominantly invested. If you’re looking out from the moon, so to speak, where do you look to invest? Which part of the 200-plus different markets that we have across planet earth?
JUSTIN CLARKE: I think that’s very important and probably the one thing that we as South Africans really need to do. In fact, that’s not restricted only to South Africans. If you took a helicopter view and looked down at the South African environment, there would be a very low probability that you would invest in long-term fixed real estate in South Africa, I’m afraid. I think if you have a look and you can be exposed to what’s happening in the rest of the world, Simon, there’s just too many more secure and better options for you to grow your wealth and look after your money.
Perhaps the best thing to do is to talk about why our investors are moving offshore, because I hear that every day, all day. The first of course, is something we are all very aware of – a stable, political environment.
Then I guess the rights would have helped put this in context, but on a granular level there are no escalating pressures from a radically increasing cost of utilities. We don’t have to take extraordinary measures to provide alternative power. Transport networks in a lot of the first world are pretty much glued in place. I’m thinking rail and underground and the like. [In South Africa] there are just generally poor medium-term growth prospects, there’s low GDP growth, and low-income growth per person, which of course creates this this big divide between rich and poor – and overall poor growth fundamentals.
I think there’s devaluation of the rand – that’s another big one, and of course let’s not forget the very dangerous regulatory environment, thinking about expropriation without compensation, that bill that’s had a lot of air lately.
SIMON BROWN: Looking at it, we’ve talked around the different parts and the like. There are different ways for an individual, an investor, to get that exposure in terms of different publicly-traded funds, property funds and the like.
JUSTIN CLARKE: Yes. As a South African it’s quite difficult to invest offshore. You can’t necessarily just pop across and get a bond and buy a property or buy a house or a building. There’s a lot of compliance. But there are easy ways. Simon, you speak a lot of the Reits in South Africa. Certainly I have more expertise in the US, I guess.
If we have a look at US Reits, for example, 90% of all the taxable income that a Reit earns has to be distributed to taxpayers. It’s a very, very strict regulatory environment; 75% of the cash or the assets of the Reit have to be in cash, real estate or US treasuries. So there can be no speculative assets in there.
As I mentioned, it costs several hundred thousand dollars to set up even a private Reit. You can get publicly-traded Reits or private Reits. Of course it’s very easy. You can get hold of your stockbroker or your financial advisor and get them to get you some interest in Reits.
I think one of the other things with Reits is that they tend to trade relative to market sentiment. Again, a good one for you – we experienced this very strange scenario where you’ve got fantastic asset value or lots of very good buildings sitting in a Reit where they trade at a fraction of the actual value of those underlying assets.
SIMON BROWN: Yes, that market sentiment. It’s great sometimes, but it cuts both ways of course.
And then the last one – which is the space that OrbVest is sitting in, syndicated property – talk us through that process and the obvious attributes around that.
JUSTIN CLARKE: Absolutely. I think the problem that we set out to solve was originally predicated on high-net-worth individuals, property guys from South Africa, who were looking for offshore investment. Effectively we looked at the sort of buildings that we would like to acquire. We looked at the fundamentals of what the perfect world would be for an investment in real estate. That kind of funnelled us into medical real estate. We do have – Simon as you know, you’ve interviewed him – Hennie Bezuidenhout who is our chairman and co-founder. He spent the last 30 years in South Africa building up this very large portfolio of medical office buildings and hospitals. So we’ve got a significant amount of IP [intellectual property] in this space. That certainly helped.
Once again, we take a building, we acquire a building and this is a building that probably normally would not be accessible to the average investor. Why? Because the Reits and the institutions would be acquiring it. But because together we all form a bigger block and we can write out the bigger cheque, we acquire this building.
Then what we do is we just syndicate it. I know that’s not a great word in South Africa – but we do it in a very sophisticated way.
We actually list that asset on a small exchange and you buy a share in that asset through holding a listed security. But the most important thing is you are actually buying a piece of that bricks-and-mortar. You actually can look at the leases, you can look at who the tenants are, how strong they are, what part of the building they occupy. You can look at the report of the condition of the building.
So it’s a very secure investment in that you know exactly what you’re in.
It doesn’t matter what the stock market is doing, provided you’ve got long-term leases in place, which is what we obviously have in medical.
Then the economy is not really affected.
SIMON BROWN: And I can, if I happened to be in the States, literally go and so to speak ‘kick the tyres’.
We’ll leave it there. That was Justin Clarke, COO at OrbVest. You can go to OrbVest.com on the website, have a look around, and send a message. Otherwise email Justin@OrbVest.com. Justin, appreciate the time.
JUSTIN CLARKE: Thanks very much, Simon.
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