Public enterprises minister Alec Erwin's recent announcement that Transnet is to sell its 26% stake in Cape Town's Victoria & Alfred Waterfront (V&A) has triggered a frenzy of activity.

But despite the V&A being an icon development, and the sale being in play when commercial property prices are leaping, this may not be the opportunity some investors are expecting.

The main interest seems to be from black economic empowerment (BEE) groups. The Public Investment Commissioners is believed to be carrying out a due diligence study on the V&A with the aim of supporting such groups.

BEE property enabler Property Partners says it has a war chest of up to R4bn to back BEE investors, though the price is likely to be lower than that.

Commercial property is in a growth phase and investors are pouring in. The shortage of good investment stock has meant that yields on prime properties are plunging to levels not seen for decades. Prices rise when yields fall.

A few years ago, the V&A would have sold at yields of around 10%. If, for instance, its net annual income had been R200m, it would have been valued at R2bn. But the SA market is experiencing sharp yield compression, when purchase yields fall and prices rise in anticipation of an upswing in demand for factory, office and retail space. Yields for such properties have fallen to a little over 8%.

But if the whole of the V&A were now for sale, intense competition could push that yield down to an unprecedented 6,5% and the value of the R200m income would increase 50% to R3bn.

That 74% of the V&A is owned by three Transnet pension funds makes property fund managers even more wary of buying a minority interest. Pension fund managers are notoriously uncommercial, so property fund managers would not want such a small stake.

Marc Wainer, property deal maker for Madison, SA's largest listed property fund manager, will not be bidding. He has been put off by the pension funds having a pre-emptive right to buy the 26%. This could result in preparations for an offer being an expensive waste of time.

"What makes a minority share even less palatable is that ownership includes the whole V&A basin and not just the Waterfront development," says Wainer. "Transnet pension funds might be prepared to make noncommercial decisions on the harbour portion of the basin in the future interests of their members, but these won't necessarily be in the interests of our shareholders."

Mike Aitken, CEO of property fund manager Corovest, says he would not be interested in buying the share for less than an 8% yield. "But it's probably an ideal BEE opportunity - particularly for a black-empowered pension fund."

V&A management will not reveal the current annual net income on which the purchase yield would be based. But it is possible to speculate on a value from the amount of property already built and the size of further property - the "bulk" - that can still be developed.

The V&A is already SA's largest property development, with 300 000 m² of shops, offices, hotels and a residential marina. But the amount of lettable or saleable space that the Cape Town municipality will allow it to build is 604 000 m².

Property Partners CEO Stuart Chait says that, with V&A residential prices at about R35 000 m², the 140 000 m² of residential bulk available would sell at about R10 000/m² or R1,4bn. The 124 000 m² of commercial bulk would be worth about R2 000/m² or R248m.

The 63 000 m² of existing retail space would be worth almost R1bn; the 76 000 m² of offices about R400m; the 63 000 m² of industrial about R120m; and the special facilities - for instance, for conferences - about R80m.

It would be difficult to value the seven hotels. SA investors are not accustomed to the long leases that the hotels have bought, but even with three or four decades of leasehold to run, they do have a value. There are also 150 yacht moorings and other harbour assets.

The value of 100% ownership would probably be at least R3,5bn. But with the current mood of the market, that could rise to R5bn. Normally a minority buyer would seek a discount on the full value, but with the mood and interest, Transnet could receive about R1bn for its share.

Financial Mail