Global investment  

By Ian Fife, Cannes, France 
 
Real estate is going global. And developing economies around the world can look forward to the prospect of more than US$150bn (R1 trillion) pouring into their property markets in the next few years. But SA must move fast if it hopes to compete with rivals in Central Europe and Southeast Asia. 

Falling property returns are driving big US, UK and Irish capital out of local markets and up the risk curve. And migration of hundreds of millions of people into developing cities is creating enticing opportunities for them.  These changes are turning what was an annual European property show, MIPIM in Cannes, into the world's largest property market.

About 25 000 property men are in search of capital, clients or investment opportunities. It is becoming a battle of cities for what one visiting banker estimates is $100bn of US opportunity fund money and euro 50bn of European capital. 

St Petersburg, Moscow, Vilnius in Lithuania, Warsaw, Prague, Dubai, Berlin, and scores of other cities - and many countries - last week plied visitors with food, drink and what they promised would be worthwhile investment opportunities. Bankers, investors, fund managers, valuers and brokers scoured Cannes for contacts and deals. 

Cape Town and Johannesburg were there for a third year. City of Cape Town CEO Andrew Boraine and Johannesburg Property Company GM Mashilo Pitjeng acknowledge they lag other cities. "We have a lot to learn in aggressively marketing ourselves," says Boraine. "I can see now that Cape Town lost an opportunity to market itself to Johannesburg companies that were fleeing its city centre.

That's what other cities at this show would have done."  And both he and Pitjeng believe their cities have important advantages to sell. "We are definitely more advanced in our public-private partnerships and in the way we develop planning with our local population," says Pitjeng  Other SA advantages were clear from presentations at MIPIM on Moscow and Vilnius. Neither of these cities give proper title to its land and the sellers lack experience and are often suspect.

They charge enormous land taxes and there is little property infrastructure such as finance, seasoned brokers, analysts and property managers.  SA has all of that and more: registered title deeds, well-tested laws, internationally competitive property services and world-class banks to finance deals - all using internationally recognised procedures in English. 

Yet Fleming Family & Partners, a large UK private equity company, has just completed the first institutional purchase of an office building in Moscow. With all its risks, the $23m deal will provide an initial yield of less than 6% with unstructured finance and 7,5% with structured finance. Fleming Family & Partners would get at least 10,5% on a similar purchase in SA. 

"The lesson in this environment is that you must compete in all things, not just most things," says Old Mutual (OM) property chief Ian Watt, citing bureaucracy, the rand and Zimbabwe as deterrents. OM is investing in competing emerging countries.

Its subsidiary, Heitman, is developing 5 000 residential units in Poland with an Israeli group.  The risk premium that determines the initial yields and property prices in those countries is plunging, says Michael O'Hara of AIB Capital, which has bought its first office block in Warsaw.

"A few years ago it was 8,5%. Now it's 1%." That means prime property yields have fallen from 16% to 8,5% and prices have almost doubled.  But until the Zimbabwe problems are out of the way and SA shows that it is receptive to foreign property investment, its risk premium, currently about 6%, will remain, says Roy Ettlinger, asset management partner at London-based SA fund advisers Credo.

"I don't see it changing for around four years."  Steve Mallen, research chief at Knight Frank, the international consultancy, agrees.

"There must be clear fiscal, structural changes."  But, says Credo property director Gavin Rabinowitz, yields in developing markets are starting to fall so low that eventually institutional money will find its way to SA property.  Irish Howard Holdings chairman Frank Gormley is even more bullish.

Punting his Cape Town CBD residential conversion of the BoE offices - cleverly named Eurocape - he says: "We're selling there like mad. The institutional investment will follow soon."