| South Africa’s real estate market is banking on the 2010 World Cup, but construction costs are putting pressure on yields. By Jennifer Creevy  The Victoria & Alfred Waterfront in Cape Town is South Africa’s most visited destination. Arching between Robben Island and Table Mountain, the oceanside complex is usually heaving with tourists and locals enjoying various entertainment and leisure activities and browsing in the 400 or so shops.
Last year, however, several groups of much bigger spenders were in town. When Transnet, the government’s transport conglomerate, put the Waterfront’s real estate assets on the block, around 60 companies from all over the world excitedly formed a queue. The development was finally snapped up for a staggering (by local standards) 7bn rand (€705m) by a consortium comprising British brothers Ian and Richard Livingstone’s privately owned London & Regional Properties, which took a 50.1% stake, and Istithmar, an investment vehicle owned by the Dubai government, which took 24.8%. The remaining stake went to Black Economic Empowerment, a government-sponsored investment program. The deal not only marked South Africa’s largest property transaction to date but also helped propel the country onto the global property agenda. Craig Ewin, CEO of SA Corporate Real Estate Fund, says there has never been more interest in listed funds than at present: “The Cape Town deal attracted global interest, and since then we’ve had many foreign investors eyeing our stock.” Investors are aware of the returns to be gained in South Africa. The commercial property market achieved total returns of 26.7% in 2006 according to Investment Property Databank, and while returns on retail property slipped slightly from 32.6% in 2005, they still delivered an impressive 27.4%. As global investors are generally more interested in yield than in capital growth, South Africa still trumps most of its international counterparts, offering an average income return of 9.2% in 2006 compared with 5%–7% in most of Europe, the US and Australia. There is a danger that retail has peaked, however. Brent Wiltshire, business development executive at Old Mutual Investment Group Property Investments, says: “There seems to be more demand for industrial and office space at the moment.” The fear is that supply will outstrip demand. Most of the major cities are covered in terms of shopping centres but many are expanding, and a number of smaller neighbourhood and township schemes are in the pipeline. Old Mutual’s Gateway shopping centre in Durban, for example, is currently undergoing its fifth extension. Rising interest rates have dampened the retail sector, and construction costs – which are around 20% higher than in 2004 – mean there is significant yield pressure on new developments. “Rents haven’t grown much over the past couple of years and retailers are finding it tougher, so we could see an excess of supply,” says Mike Flax, executive director at Madison Property Fund Managers. “We are now focusing on mixed-use schemes, which will hopefully continue to drive growth.” Ewin says there is plenty of scope for investors and that the biggest challenge for South Africa is to raise its profile. “We are fairly remote from Europe and our relative size compared to other emerging countries such as China and India poses some challenges, so we need to highlight the opportunities,” he says. That profile will surely be lifted by the country’s hosting of the FIFA World Cup in 2010. London & Regional Properties is gearing up to double the Victoria & Alfred Waterfront’s size by then, to create what director Richard Livingstone said could become “a focal point for the FIFA World Cup”. We could well see other investors following suit. |