MEGAPROJECTS COMMENT

Posted On Friday, 18 January 2002 02:00 Published by eProp Commercial Property News
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Big isn't always beautiful, as the past year's experience shows

Gareth HaysomSA is spoilt for choice when it comes to huge property developments. But should they ever have been built?

This time last year (Property January 12 2001), the FM surveyed five developments: Gauteng's Melrose Arch and Montecasino (Fourways); KwaZulu-Natal's Gateway retail centre (Umhlanga); and the Cape's Canal Walk (Century City outside Cape Town) and Spier Estate (Stellenbosch). Only two can be described as successful so far: Montecasino and Spier.

A committee without a vision was developing R3bn Melrose Arch, argued critics last year. The mega project was also exposing the beneficiaries of the owner, the Mines Pension Fund (MPF), to risk. Its first phase - 90 000 m² of offices - was too large and overpriced at a rent of R120/m². Soon after it opened in October, with one tenant, Investec Property Group took it over and dropped rents to R75/m².

This doubly punished nearby Sandton CBD by weighing the market down with too much office space, as well as undercutting rents and taking potential tenants. Sandton rents have also fallen, and the Gauteng office market is in trouble.

Gateway at Umhlanga Rocks, Old Mutual (OM)'s R1,3bn temple to property CEO Ian Watt's religion of shoppertainment, was launched a year after R1,5bn Canal Walk opened in Cape Town. Big stores in both mammoths report outstanding Christmas sales. 'It seems these major entertainment centres are generating new consumer spending,' says Woolworths property director Paul Simpson.

This is small comfort for shareholders, pensioners and policyholders, who may wait a long time to get real benefits from the developments. Those who decry them argue that Melrose Arch and Gateway will not produce the acceptable returns OM or MPF could have got elsewhere.

'Either they must rerate them - and other properties - on the basis that they will provide better long-term benefits,' says retail consultant Pat Flanagan, 'or write off hundreds of millions of rand.' Canal Walk shareholders BoE, Monex and Shoprite have tried and failed three times to sell the development - even after capital write-offs.

Flanagan says it will take up to three years to determine whether Gateway and Canal Walk will eventually give decent returns. 'Gateway's design and environment-al planning are world-class,' he says. But this comes at a capital cost, which will either push rents ahead of what retailers can sustain, or push policyholders' yields down to as little as 6% (the requirement is 10% plus).

On target for success, though, are Tsogo Sun's R1bn Tuscan village-in-a-box, Montecasino, and Spier, the socially and environmentally friendly 1 000 ha estate developed by insurance billionaire Dick Enthoven.

Montecasino GM Steve Howell ascribes initial difficulties for retailers as 'part of a normal cycle'. More than 10m people visited the leisure centre in 2001. Fewer than half spent money at the slot machines and tables, and close on 70% live within 10 km of the pleasure palace.

Spier, too, is approaching R1bn in total investment as forecast, says GM Gareth Haysom. It has diverse businesses, all balancing financial, social and environmental concerns. Apart from the amphitheatre, restaurants and conference facilities, they include: wine distributor Winecorp; Go Organic, now the leading supplier of organic food to Woolworths and Pick 'n Pay in the Western Cape; the R150m Village Hotel; a R400m Ritz Carlton Hotel (planned for this year); and golf and other residential developments. It also has social development projects, including a school and residential village for farm labourers.

Development cost of the five projects totals R6bn. Only R2bn of this - at Spier and Montecasino - is justified by the financial returns. BoE and Monex are paying in the short term for their extravagance with their own cash and debt.

But who at MPF or OM will be falling on their swords for wasting their pensioners' and policyholders' money?



Last modified on Thursday, 15 May 2014 13:20

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