Melrose Arch developer buys out its 50% joint venture

Posted On Friday, 06 May 2011 02:00 Published by eProp Commercial Property News
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Cape property entrepreneur Stuart Chait has sold his interests in trendy Jo’burg work, live, play and shop precinct Melrose Arch to co-owner Amdec in a lucrative deal.

Stuart ChaitCape-based property entrepreneur Stuart Chait has sold his interests in trendy Jo’burg work, live, play and shop precinct Melrose Arch to co-owner Amdec in a lucrative deal that will pocket him a small fortune.

When Chait and his offshore partners, UK-based Tony Criss and Cyprus-based Allan Collier, bought the mixed-use development six years ago, many considered Melrose Arch a white elephant. The trio, through their company, Property Partners, acquired the partially completed development from the Sentinel Mining Industry Retirement Fund in early 2005 for R1,27bn. It was then regarded as the largest private property deal ever concluded in SA.

At the time, the general view was that Chait’s consortium was paying too much for a seemingly overcapitalised and commercially impractical development. Back then, other suitors, including the likes of JSE-listed property fund Sycom and industry veterans Marc Wainer and Wolf Cesman, on behalf of listed funds Hyprop and Redefine, had apparently offered less than R1bn.

But the R1,27bn gamble paid off handsomely for Chait and his partners. Since 2005, around R2bn has been spent on doubling Melrose Arch’s office, retail and restaurant space to 200000m² That saw the rental income surge from R75m/year in 2005 to around R300m in 2010.

Today Melrose Arch is valued at R4,5bn and is widely regarded as one of SA’s most profitable real estate assets. The Melrose Arch success story has been driven in no small part by developer Amdec, which was brought on board by Property Partners in a 50-50 joint venture in July 2005.

Amdec, founded by British-born father and son John and James Wilson in Cape Town in 1989, led the development vision for the precinct while Property Partners’ role was primarily one of a passive investor. Though Amdec had humble beginnings, renovating and on-selling homes in leafy Constantia, the company’s portfolio of commercial, retail and residential property has since ballooned to a colossal R6bn (including the remaining 50% stake in Melrose Arch).

That places Amdec in the company of SA’s largest private property owners, including Atterbury, Zenprop and the Rabie Group Though Melrose Arch is Amdec’s single biggest property asset, the developer is also a key player in Johannesburg’s affordable housing market and has exposure to a number of retirement developments across SA.

Less than 60% of Melrose Arch has been developed to date, creating potential for further value extraction over the next few years. So why are Chait and his co-investors cashing out now?

Chait says the decision to sell the Melrose Arch stake was not taken lightly.

But it gives him the chance to explore other investment opportunities. He believes there’s plenty of value to be had in SA’s distressed residential property market, as well as a number of offshore commercial property markets where prices are still way off their 2007 peaks.

The strong rand makes it an opportune time for Chait’s overseas partners to take their money offshore.

And Amdec, under the helm of the unassuming but shrewd James Wilson, no doubt had a strong enough balance sheet to effect a buyout. Wilson, a chartered accountant, ascribes the timing of the transaction to different investment visions. “Amdec has a longer-term development vision, while Property Partners probably saw value in a slightly shorter-term investment vision.”

Though Wilson and Chait are bound by a confidentiality agreement regarding the exact terms of the deal, Amdec is believed to have paid around R2,25bn for Property Partners’ 50% share of Melrose Arch (including debt and liabilities).

Wilson is now keen to roll out the final phase of Melrose Arch’s master development plan. There’s another 160000m² of approved bulk rights to be developed, which Wilson is confident will be completed by end-2016. That will take the property’s value to R10bn.

Some 42000m² of retail space, 60000m² of office space, two new hotels and more residential units will be added to the mix. Wilson plans to introduce smaller bachelor, one- and two-bedroom apartments priced between R1m and R2,5m within the next two years to attract young professionals who can’t afford the current entry level of R3m.

Ultimately, says Wilson, the aim is to create a real estate destination that will be internationally recognised as the location of choice for tourists and tenants alike. Wilson believes Melrose Arch has the potential to become as recognised a landmark as Cape Town’s V&A Waterfront — even though it doesn’t boast the same prime geographic location.

In fact, Wilson maintains that if one compares the two property assets purely on an investment return basis, Melrose Arch has trumped the Waterfront. Melrose Arch commands the highest office rentals in SA at between R175/m² and R210/m² gross compared with an average R140/m² at the Waterfront (Growthpoint figures). The only other building in SA believed to have fetched close to R200/m² is Redefine’s Convention Tower on Cape Town’s foreshore.

In addition, Melrose Arch is fast becoming one of Gauteng’s most desirable residential addresses. Last month two local businessmen forked out a cool R30m and R25m respectively for lavish penthouse apartments sized between 750m² and 800m² in what will become Melrose Arch’s third residential phase. That’s more than double the previous sales record achieved at the precinct (R12,5m for a 350m² apartment).

The 38000m² Piazza retail offering that opened in the midst of the recession in April 2009 has also defied the odds. At the time, sceptics predicted that Melrose Arch’s attempt at replicating a highstreet shopping experience akin to Regent Street in London would fail.

Wilson concedes that when the new retail centre opened, trading conditions were tough. In addition, the offices above the retail centre were 75% vacant. But within nine months the vacancy had shrunk to less than 1,5%. And in the year to end-March, the retail centre recorded 40% growth in sales turnover.

National retailers like Edcon are clearly pleased with their performance, with the group last month taking up another 500m² to incorporate a Boardmans into its existing Edgars store. Wilson says construction on the second phase of the retail centre will start later this year. The latter will bring more convenience traders such as Pick n Pay, cinemas and another Virgin Active gym to Melrose Arch.

A key question is how long Amdec will hang on to Melrose Arch. With listed property players and cash-flush pension fund managers such as the Public Investment Corp intent on bulking up their portfolios with prized real estate assets, one would assume there are plenty of buyers prepared to pay a premium for Melrose Arch.

“That may be so, but we’re definitely not sellers,” says Wilson.

Last modified on Wednesday, 20 November 2013 10:26

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