MICHAEL AVERY: Going nowhere slowly in local government Trabant

Reading through President Cyril Ramaphosa’s state of the nation address and the reaction to it — much of it jaundiced despite the commendable recognition and constant reinforcement that the government must create the conditions for the private sector to get on with growing the economy and then get out of its way — I was reminded of an old joke told by one of the last great statesmen, US president Ronald Reagan. Back when politicians told their own jokes and they weren’t the punchline. 

It was one of Reagan’s favourite jokes about a Russian man who wanted to buy a car. Back then not many Russian families owned cars. The Trabant was an awful car made by the communist state. The man goes to the official agency, puts down his money and is told he can take delivery of his automobile in exactly 10 years.

“Morning or afternoon?” the purchaser asks. “Ten years from now, what difference does it make?” replies the salesman. “Well,” says the buyer, “the plumber’s coming in the morning.”

The story is a matter of delivery. For all of Ramaphosa’s promises, plans, consolidating power and execution inside the presidency (why not make Sipho Nkosi small business minister instead of bureaucratic adviser?), his administration continues to fail on crucial areas of delivery.

Take the Maluti-a-Phofung special economic zone (MAP-SEZ) in Tshiame, Harrismith, Free State. The 1,038ha MAP-SEZ was launched in 2017 and hailed at the time as a milestone in the implementation of the then department of trade & industry’s special economic zone (SEZ) programme, which aimed to accelerate economic growth and development in designated regions of the country through special tax breaks and other concessions.

But the near collapse of the Maluti-a-Phofung municipality threatens to scupper the project barely four years in. Tommy Garner, former CEO of Cenergi and chair of the SA Independent Power Producers Association, who advises a Danish multinational butchery, an early investor in the park, tells me the SEZ has been without power since December 22 after a lightning strike damaged the substation providing power to the nearly 30 businesses inside.

There is still no electricity supply, despite numerous attempts to engage with the park’s owner, the Free State Development Corporation, and the councillors who pretend to be in charge of the Maluti-a-Phofung municipality.

The butchery has been forced to spend almost R50,000 a day on diesel running backup generators, and 2,000 workers have been retrenched, all over what the Danish investor says would be a problem that would typically take two days to fix in Denmark.

Energy remains the most critical constraint on the economy. The president spent time acknowledging as much in his address and outlining the new capacity that has been procured as well as the gazetting of amendments to the Electricity Regulation Act. This is a long overdue welcome development and another important step towards liberalising the country’s energy markets, but it will amount to nothing if the crisis in local government is not addressed. 

Due to the endemic ineptitude and incompetence that has entrenched itself inside the national condition at local government, rural SA seems doomed. Maybe the investors in the Maluti-a-Phofung SEZ will see a technician in 10 years’ time.

Having attended the SA Real Estate Investment Trust (Reit) Association conference recently, it is clear the sector has done soul searching since the “go-go years” (as one analyst called them) of 2010-2016, which saw returns of roughly 30% a year and an obsessive focus on the search for yield. The sector was ruthlessly exposed when the pandemic pulled the tide out to reveal the naked reality of over-geared balance sheets and too little focus on operating fundamentals. The resulting shock waves of the last two years rippled out in the form of property devaluations, asset disposals and balance sheet repair.

Vacancies in commercial office remain stubbornly high across the listed property Reits. And the outlook for office space remains clouded by the tepid local economy and whether some of the shifts ushered in by the pandemic will become permanent features. Living at work surely isn’t the way to build successful corporate cultures, and consensus seems to agree on a return to office at least a few days a week.

Retail and logistics have a clearer path back to growth. And as Morgan Stanley retail analyst Bart Gysens pointed out, historically the best time to invest in property has always been when vacancies are high and discounts to net asset value large. Backing those management teams that have survived the shakeout and play in sectors with more certain recovery prospects looks like a decent strategy.

And, despite rising rates being a drag, historically periods of inflation have also tended to support listed property, provided central banks aren’t too far behind the curve and the market isn’t taken off guard by rates rising far faster than anticipated.

Another question floating around at the biannual industry gathering was whether we are entering the era of private markets. Increasingly, market participants I talk to are questioning whether the structure of public capital markets is fit for purpose.

Andrew Brooking of Java Capital points out that public markets demand higher returns than private capital. Also, private capital pools are deeper. So unlisted real estate can access more and better priced capital than listed real estate. Which is crazy as listed real estate also demands investors get liquidity.

Listed markets are just not making sense.

• Avery, a financial journalist and broadcaster, produces BDTV's Business Watch. Contact him at Badger@businesslive.co.za.