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[TOP INTERVIEW] Providing communities with more affordable retail, employment and economic growth

The Futuregrowth Community Property Composite has proved to be a very viable and defensive investment strategy: fund manager Smital Rambhai.

SIMON BROWN: I’m chatting with Smital Rambhai. He runs the Futuregrowth Community Property Composite, which is a fund investing into malls in rural areas and townships – not the traditional space for people investing. Smital, I appreciate your time today. The fund was launched back in 1996. Back then there was truthfully little or no development in our townships, in our rural areas of South Africa, but over the life of the fund it’s proved itself to be a very viable and, quite frankly, a very defensive investment strategy.

SMITAL RAMBHAI: Correct. Thanks, Simon, for interviewing and taking the time out. I think this fund has been under the radar for quite some time and, back in ‘96, as I said, there was no development out in townships and rural areas. We saw an opportunity, first of all, to create employment during the construction phase, as well as post-construction, because retailers and the centre need staff to run things daily and 80% of all employment in our shopping centres comes from the direct local community. So not only are you providing more affordable retail to communities and bringing them closer, but you’re also creating employment and growth in the economy.

SIMON BROWN: Yes, obviously that employment, that growth, is hugely important. A small thing which occurred to me is the saving on transport. If you’re in a rural area, if you’re in a township and you have to get to the city, that’s an expense. Actually, there’s a triple benefit if that also puts cash back into the community, which they probably are then going to in part spend at those malls.

SMITAL RAMBHAI: That’s 100% correct. When we look at purchasing shopping centres or entering into a development partnership, we look at factors where communities are far removed from urban kind of areas to access facilities. I think one of the key backbones of our economy is that the social grant system is quite big, and, if you look at our government pension payout these days, it’s roughly R1 700. If you have to travel 30 to 40 kilometres to obtain that grant, you’re eating away all of that disposable income, and there’s less in the consumer’s pocket.

SIMON BROWN: And that adds to that defensive nature. Obviously, there’ll be essential goods, essential services available. These are going to be cash customers, as you mentioned. A lot of that is going to be the grants received from the government making these malls a lot more defensive than perhaps your typical Moreland and sort of Hyde Park or Cavendish Square, which is going to be at the vagrancies of the
broader economic activity.

SMITAL RAMBHAI: Correct. We don’t have a lot of high-end brands. You won’t find a Gucci or Armani store at the shopping centres. Those are discretionary kind of spends. The core of our retail focus is on essential goods. And, as I said, we’ve been quite defensive because it proved very much in the
lockdown under Level 5 that shopping centres were resilient because people need to buy groceries. Online retail didn’t really penetrate our portfolio because the majority of our consumers live in townships and in rural areas. If you look at online retail, they can’t really receive online deliveries efficiently owing to the logistics. They can’t afford bulk online purchases to make online retail feasible. Our consumers spend on average R30 to R100 per day. So our centres just naturally have the traffic because of the economic circumstances of our consumers.

SIMON BROWN: I hadn’t thought of that. Obviously in our traditional malls online is hurting. If I think about the sort of lockdown we’ve been in, I think I’ve been to a big mall maybe once or twice. My shopping has shifted online. That’s not going to happen in a rural or a township area. We’ve also got the challenge in the urban areas. We are truthfully manically overtraded with malls, be they sort of midsize or the supermalls that we have in our major metros.

SMITAL RAMBHAI: That’s absolutely correct. We’ve found that often in the areas in which we operate, especially in the rural areas, we don’t have a lot of competition. I think to set up a shopping centre out in the rural areas before development even commences, sometimes it can take seven to 10 years just to establish a site or develop it, whereas, if you’re in an urban area, to develop a new mall could take you two to three years in the planning stages before you start constructing. So a lot of patience is needed in this game.

SIMON BROWN: Yes, It is a patient game. I get that. And you’ve got, what, 32 located in various different rural areas, townships across the country built up. What interested me is it’s not only necessarily purchasing. You also, if I understand correctly, are actually doing that development – identifying areas and starting from scratch.

SMITAL RAMBHAI: Yes. Maybe the great thing has been to create shopping centres over the life of the 20 years. We currently have 20 shopping centres in the fund and we operate in eight of the nine provinces. Just in terms of the developments, we run our fund similar to the Reits, in that we are more income-focused, so we prefer buying completed developments. But, when we see an opportunity to do an expansion, we do that largely ourselves with our partners, Capital Land, which is a property-management company. We try to stay away from doing complete greenfield developments because we are income-focused. If you do development from scratch it is obviously an income drain for our investors, which are predominantly pension funds.

SIMON BROWN: Got it. And, looking at the returns and because of the processes, it launched earlier, but it’s effectively launching one ……. But the point is the returns it manages to give. And, when I look at the chart of return, it is giving what it says on the sticker, which is that nice, steady, predictable, and, to your point, income-generating return over the long term.

SMITAL RAMBHAI: If I just give you a breakdown of the returns over the last 20 years, this fund has generated a return of CPI plus 8%, and that’s on a ……-year basis. So it just demonstrates we are very much long-term focused. When we do acquisitions, it’s not about whether the initial yield on a property looks attractive. It’s whether that income growth is sustainable and whether we see growth in the area in which the shopping centre is located. So when we do our due diligence it doesn’t just go to the fact that, oh, there are good leases in place. It looks at the economic drivers of the area and sustainable industries around that to further support the growth.

SIMON BROWN: And CPI plus 8%, and getting a solid return. We’ll leave that there. I really appreciate your time. Smital Rambhai is from the Futuregrowth Community Property Composite.

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