Stephen Cranston

Demand for new office space will be low

Focus will move away from foreign tourists

“It is an achievement for Growthpoint that the deal will barely affect its distribution or net worth per share”

— ANGELIQUE DE RAUVILLE

The V&A Waterfront in Cape Town is still the most popular tourist attraction in SA. But that is in spite of and not because of the consortium that has owned it for the past five years.

The new owners (subject to approval), Growthpoint Properties and the Public Investment Corp (PIC), hope to inject new energy into the complex, which needs rather more than a lick of paint.

The Waterfront is unique, as no other mixed-use property of its size is owned by a single landlord, and it retains a working harbour. But few financial institutions have the firepower to buy and develop it.

Growthpoint CEO Norbert Sasse says even now just two-thirds of the zoned area has been developed. There is still 220000m² of bulk space — which can be developed into at least 1mm² of lettable space, even if only low-rise buildings are built.

When Dubai World and London & Regional bought the centre from Transnet in 2006, there were promises that top London shops such as Harrods and Harvey Nichols would come into the centre, alongside Dubai-style hotels. Less than 30000m² of the available bulk was developed despite investments of at least US1bn being promised; promises long forgotten after Dubai World acquired debts of more than 40bn by 2009.

Visits to the Waterfront have been static at about 21m/year, and access to foot traffic remains limited.

The sale was not at a distressed price. Growthpoint and the PIC paid R9,7bn, a premium on the R7,2bn paid by the foreign consortium. And thanks to a strong rand, there was also a profit in US dollar terms.

The Waterfront stood out in their foreign portfolios as it was so far from the rest of their assets. London & Regional has most of its properties in the UK, Germany and Russia. Dubai World is retreating to its Middle Eastern home market.

In contrast, the PIC and Growthpoint run SA’s two largest property portfolios and work closely together — the PIC is by far Growthpoint’s largest shareholder, with a 27% holding.

The PIC’s property portfolio, including the Growthpoint shares, is worth R27bn; the SA portion of Growthpoint’s properties is worth R32bn — and this includes R6bn in Cape Town. Growthpoint can afford to fund the deal entirely in debt, as its gearing or loan to value ratio will increase to 40%, but within the limits set by its board.

“The V&A is not a bargain,” says Sasse, “but we believe that all the fundamentals are in place for the long term.”

Growthpoint shareholders get exposure for the first time to the hospitality sector. There are nine hotels leasing their space on the Waterfront.

Growthpoint has identified empty space at the Granger Bay (western) entrance to the complex and another spot close to the Somerset Hospital to develop mainly into office space.

Elias Masilela, the new head of the PIC, says future development of bulk gives a growth opportunity. This would not be a feature of the purchase of a conventional shopping centre or office park.

Redefine CEO Marc Wainer says his group didn’t bid for the V&A as the yield would be too low for it and a lot of work needs to be done to give it good long-term prospects. “Few will be banging on the doors to take new office space at the V&A. But I have a high regard for Norbert and know he can fix things,” he says.

The V&A has the lowest vacancy rate in the Western Cape, at less than 3%. But there is plenty of room in rival office nodes such as the CBD and Century City (both 10%) and Claremont (15%).

Keillen Ndlovu, head of listed property investments at Stanlib, says the Waterfront deal is good for Growthpoint shareholders. On an initial yield of 7,2% (well ahead of the 5% yield the foreign consortium originally earned), it will dilute the income Growthpoint can pay out (it is on a forward yield of 8%). But in the medium term, the redevelopment of land will more than make up for this dilution.

To raise cash, the residential component will be sold. “We are not long-term holders of residential land,” says Sasse.

Sasse says that at the end of the day the Waterfront belongs to the SA public. This will probably mean that it will have greater pedestrian access and perhaps a more popular, down-market atmosphere will be created. There is no hint that any more luxury hotels are on the cards. No doubt the PIC has similar sentiments. Few of its 1,2m members or 300000 pensioners would be able to afford the facilities at the One & Only Hotel.

Investec Property fund manager Angelique de Rauville says it is a pity to see substantial international investors leave the country. “But it is an achievement for Growthpoint that the deal will barely affect its distribution or net worth per share.”

Source: Financial Mail