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PROPERTY INVESTMENTS SA property coups
(Financial Mail Via Thomson Dialog NewsEdge) PROPERTY INVESTMENTS SA property coups WHAT IT MEANS Financial institutions have missed out on the property boom Transnet has twice come out on top Carlton Centre Corner House Melrose Arch Canal Walk V& A Waterfront SA's large financial institutions have left property investments to entrepreneurs It's been the decade of the property entrepreneur in SA since the large financial institutions pulled out in the mid-1990s and abandoned the asset class for offshore investment.
Some spectacular coups, five most notably, have been done in that time by smart new entrepreneurs and old hands alike and surprisingly by one struggling parastatal, namely Transnet.
Four of these must go into the hall of fame. The jury's out on the fifth Corner House in the Johannesburg CBD, whose fortunes are closely tied to those of the inner city generally.
Carlton Centre, Johannesburg Transnet CEO Maria Ramos can't really claim what has to be the property coup of the decade as her doing. In June 1999, when Ramos was still director-general at the national treasury, Transnet bought the Carlton Centre for R33m from Anglo American Properties.
Anglo had brought in famed US architect Skidmore Owings & Merrill to design it and it was built in 1973 for close to R50m (about R1,3bn in today's money). The Carlton Centre has only recently been superseded as SA's icon property by Cape Town's V& A Waterfront. The 223m, 50-floor office tower, SA's first mixed-use complex, is still the country's tallest office building The Transnet purchase was also a defining moment for central Johannesburg, marking, rather than initiating, the beginning of a slow recovery for the city.
Transnet's then property manager, Sipho Mashinini, was authorised to pay up to R38m for the complex. Though the lower price was a feather in his cap, it didn't really matter. The 180-shop centre below the office tower has a newly expanded Pick 'n Pay and probably a net income of around R38m/year. It alone must be worth R400m and the office tower at least another R75m. The Carlton Hotel has been mothballed for a decade and could soon reopen as flats and a hotel to add further value. That's only the start.
If Ramos hangs on to the property for another five years, its value as the centre of a regenerated CBD will rocket. There is little reason she can't sell it to foreign investors after the 2010 Fifa World Cup for around the same amount R7bn as she received for the V& A Waterfront (see page 68) a few weeks ago.
That would give Transnet an average compound annual return of 35% over 12 years, an unattainable dream for most ambitious property investors.
Corner House, Johannesburg Corner House, all seven floors of it, was the Carlton Centre of Johannesburg when it was built, with no expense spared, at the corner of Commissioner and Simmonds streets in 1904 by entrepreneur Hermann Eckstein.
Its panelled offices and marble floors were rented by the rich and famous of the day: Cecil Rhodes, Barney Barnato and many others. It was sold by then owner Rand Mines to Barclays Bank (now FNB) in the 1960s, when they built a new corner house down the road. But its small floors, lack of parking and out-of-date facilities made it less and less useful to the bank. As the CBD property market collapsed, FNB sold it to a college, which couldn't pay the bills.
The coup came when Cape Town advertising executive Duan Coetzee and low-cost housing developer Alfonso Botha, two boys from the Karoo in their 30s, met at a wedding in Worcester and, over many glasses of champagne, decided that Johannesburg was ripe for regeneration.
They refuse to say how much they paid the college for the property in mid-2003, but our guess is around R300/m, even less than the R400/m that Transnet paid for the Carlton Centre. They sold three floors of flats in an instant by word of mouth and stopped selling to convert the rest of the building into a trendy hotel. Coetzee and Botha have since bought another 20 or so buildings in the CBD, selling three blocks of proposed flats off plan.
But the promise of a thriving CBD street life has not yet been fulfilled and the hotel has yet to be built. Canal Walk, Cape Town The best time to pull off a property coup is when the seller knows he is selling a bargain but still has to do it. Nedbank inherited the giant Century City, along with its R1,5bn retail mall, Canal Walk, SA's biggest shopping centre, when it took over BoE Bank in 2003.
The first signs of a revival in SA's struggling commercial property market were beginning to leak out then. But Nedbank's directors, under pressure to boost returns, would have been crucified if they had hung on to the property. There were many suitors for Canal Walk, all still a bit nervous and trying to get it at below R1bn.
It took a group of SA's most experienced property men Wolf Cesman and Marc Wainer of property asset managers Madison and the Ellerine family to dig deep and buy it from a relieved Nedbank for R1,16bn in November 2003, giving an 11% yield on its R105m net annual income. It was held 80% by Madison company Hyprop and 20% by the Ellerines.
The purchase was a defining moment for commercial property. As if rewarding the buyers' boldness, consumers started frenzied shopping as interest rates fell and they grew more confident about taking on debt. Capitalisation rates on the best shopping centres plunged below 7% and prices rocketed.
But Cesman, Wainer and the Ellerines weren't stopping there. Cesman called a meeting of Canal Walk management and told them that only one thing had changed: Instead of carrying your chequebook around, you carry your deposit book. Eric Ellerine and Wainer spent their December holidays in Canal Walk working out how to tweak each detail of the massive property to gain maximum return.
The result, three years later, is an annual net income of more than R200m and a value of over R3bn giving them a R2bn profit so far, R400m of it for the Ellerines' account.
Melrose Arch, Johannesburg Property agents JHI bought up a score of houses in Johannesburg's Melrose suburb for the Mines Pension Fund in the mid-1990s. They built the first phase of Melrose Arch on a much-panned superbasement at enormous cost. Approved only if mixed office, retail and residential uses were combined, it focused almost exclusively on office buildings, with a mere three flats to satisfy the regulations. A virtually unknown property developer, Colin Barnard, bought it on soft terms from the pension fund for R1,27bn in 2002. This was considered wildly overpriced at the time, but he didn't actually come up with the money.
Into this furore waded Cape-based Stuart Chait and Alan Collier of Property Partners in December 2004. They picked the property up again at R1,27bn, paying R700m cash around 10% return for the 88000m of offices and restaurants and buying the 227000mof further development rights for a net present value of about R2100/m, to be paid for as they used it. In other words, they bought Melrose Arch for no cash. Property Partners has since successfully applied for a further 40000m of rights. It is selling the office rights into joint ventures with other developers at about R4000/m, but developing the retail for its own account. Offices and shops are already worth more than R1bn. Property Partners' total profit from the sale of rights, joint venture profits and the higher value of the retail space is likely to exceed R1bn. Having sold a 50% share of the scheme at an early stage to Cape developer Amdec, which now runs it, Collier and Chait can now sit back and collect R500m-plus.
V& A Waterfront, Cape Town Until a week before the bid deadline for Cape Town's iconic Victoria & Alfred Waterfront, the front runners for the property, put up for sale by Transnet and its pension funds, were all local: Bloemfontein property entrepreneur Nick Giorgio, who was offering R7,4bn, followed by Johannesburg developer Zenprop, part-owned by secretive businessman Jonathan Bear, and a consortium headed by businesswoman Wendy Luhabe and Stuart Chait at about R6,8bn. Suddenly there were rumours that a Middle Eastern sheik had won the bid. And indeed, London-based Livingstone brothers and Dubai's property investment arm Istithmar were announced the winners last month in consortium with a black economic empowerment group.
The coup they pulled was to join forces with Zenprop just a week before the bid deadline. Then, Zenprop director Rodney Weinstein says, they pushed the price beyond what he thought acceptable, and Zenprop pulled out.
The winning bidders also paid no cash, borrowing the R7bn from Investec, and will be watching the direction of the rand and deciding whether to bring their own money into the country.
The deal was also a coup for the Transnet pension funds, which are now fully funded.
Copyright 2006 Times Media Ltd.. Source: Financial Times Information Limited.
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