Property push

The fundamentals for Western Cape property must be rock solid judging by the plethora of corporate activity and ongoing development projects in the local real estate market.

At the close of 2016 Cape Business News (CBN) noticed several significant deals being clinched…deals that might signal that the local property market is in for a busy period this year.

Arguably the most significant development was the JSE listing of Spear, a real estate investment trust that focuses exclusively on properties in the Western Cape. The company is headed by Mike Flax, who took a similar company – Spearhead – to market in the nineties.

Spearhead enjoyed a successful tenure on the JSE before being bought out by real estate giant, Redefine. Flax reckoned that favourable economic and property fundamentals in the Western Cape were key drivers behind the Spear listing.

His portfolio is made up of 25 properties situated throughout the Western Cape – the best known properties being the Carecross head office in Newlands, the Upper Eastside hotel in Woodstock, Sable Square, Viking Business Park, The Forum and 142 Bree Street in central Cape Town.

The collective value is R1.39bn, and the ability to generate forward net property-related revenue of around R128m. The property portfolio is interestingly balanced with a mix of residential (5%), industrial (37%), retail (22%), office (27%), hospitality (7%) and other assets (2%).

The total gross lettable area of the property portfolio is a sprawling 171,786m² of which 28% is let to single tenants and 72% to multiple tenants.

One of the drivers behind listing on the JSE was to raise fresh capital in excess of R100m for new acquisitions.

What is compelling in terms of regional economic strength is that Spear’s pre-listing documentation is banking on the inherent advantages that can be unlocked in the Western Cape economy.

One of the key factors, according to Spear, is that rapidly decreasing communication cost levels mean the disadvantage of Cape Town’s “distance” – 1,500km south of the economic hub of Gauteng and several thousand kilometres from Europe, America and Asia – was becoming less and less significant.

The company argued that in-line with worldwide trends, South Africa’s export-oriented industries tended to shift towards port cities and coastal industrial belts.

“The decrease in import duties and the establishment of Saldanha Steel as a basis for Western Cape heavy industry adds more momentum to this shift.”

Spear also argued that tourism was a trump card, pointing out that 50% of international tourists who arrived in South Africa visit the Western Cape.

“Less directly, tourism stimulates the property market, especially prime residential and cluster projects, and strengthens business contacts, often a forerunner to trade, joint ventures and immigration plans.”

Spear added that Cape Town was the second largest financial centre in the country.

While the province had previously relied largely on the insurance industry as the backbone of this sector, new momentum was being generated by new, specialised financial service suppliers in the area. This was either as branches of Gauteng head offices, or as a shift of certain of the activities to the more attractive working environment of the Western Cape.

Spear said this trend included foreign firms and new investment groups focusing on the local investment scene.

Another rapidly expanding sector in the Western Cape was business process outsourcing, which included processing of accounts and claims, as well as front office activities such as call centres. Spear believed the office and industrial property segments could churn strong returns.

The company said the preference of major financial institutions to establish their head offices or branch offices in Cape Town had resulted in the establishment of financial nodes in both the northern and southern suburbs of Cape Town, as well as the Cape Town central business district (CBD). Spear believed the trend would continue.

“The growing tenant interest for Cape Town is promising for business activity in the area. The Cape Town office market looks positioned to show a stable, if not slightly reduced, vacancy rate in the year ahead, while rental rates should continue to show improvement”.

Spear noted that the industrial property market continued to be the darling of the Cape Town property sector as the demand for state-of-the-art logistics facilities and modern warehousing continued.

The company said numerous new development sites had recently been completed and a number of new developments were currently underway as distribution centres optimise height and cubic meter requirements. Spear stressed that vacancies in industrial units in the 4,000m² to 5,000m² range are at record lows as demand outstripped supply.

“This has resulted in a development cycle kicking into gear.”

Spear reckoned the only limitation to wholesale take up of new industrial developments was the substantial rental increase that has arisen…and which cannot be afforded by a variety of companies.

“Across the industrial sector average rentals – excluding new developments – have settled around the R40/m² (excluding value added tax) level.”

Spear’s acquisition trail will be intriguing to follow this year. The company wasted little time since listing, having already proposed acquiring a property in Edward Street in Tygervalley from Ingenuity – another company focussing mainly on Western Cape properties.

The property, which will cost R41m, is in very close proximity to Spear’s existing properties on Edward Street.

Speaking of Ingenuity, this specialist property company looks set for a busy year ahead. The southern suburb hub is buzzing – enhanced by the recent acquisition (and major refurbishment) of Great Westerford in Dean Street, Newlands and the much smaller Laurel Lane situated on Main Road, Claremont.

Arnold Maresky, Chief Executive Officer, Ingenuity described the acquisitions as the “last piece of the puzzle” to complete a significant grouping of properties in the heart of Claremont – adjacent to the popular Cavendish Square shopping centre. He said the total area of all the combined erven was 6,168m² and predicted that this would provide a substantial development opportunity.

“Plans are already underway for the scheme.”

After financial year-end Ingenuity sold the Loerie Centre in George for R47m and the Estuaries 1 property at Century City for R100m. Maresky explained these properties were realised as they were considered mature investments.

“The proceeds realised from them would be better applied to the higher growth development projects we have embarked on.”

Plans for the year ahead include the Food Lovers building in Claremont, which entails a 2,300m² of premium grade offices and retail directly opposite Cavendish Square. Maresky says construction would commence the second quarter of 2017 and will be completed during 2018. The anticipated total capital expenditure is almost R80m.

He says construction on Ingenuity’s 117 on Strand building has commenced.

“This exciting state-of-the-art mixed-use scheme comprising 5,200m² retail, 5,500m² premium grade offices and 117 luxury apartments will be completed during 2019.”

The total capital expenditure is budgeted at a hefty R632.5m, but Maresky disclosed that sales of the residential units were brisk with commitments for 96 of the available 103 units.

Property aligned investment company Trematon may also demand close attention this year. The company – which recently sold its stake in the Mykonos casino (see separate story in this edition) recently acquired a R614m portfolio from Redefine Properties.

The acquisition comprises seven key office, retail, industrial and mixed use assets located in strategic, high-potential nodes across the Western Cape, including Maynard Mall in Wynberg and Pier Place in central Cape Town.

The deal was executed through Trematon’s 67% owned subsidiary, Aria Property Group – which will now boast 21 assets and an additional 90,000m2 of gross lettable area (GLA). Tenants include blue chip national operators such as Standard Bank, Bidvest, Engen, Foschini, Clicks, Virgin Active, Shoprite, Truworths, Capitec, KFC, Beares and Ackermans.

Aside from Aria, Trematon also owns leisure property development Club Mykonos Langebaan (CML) and is also invested in residential real estate through the wholly-owned Resi Investment Group.

Talk in local property circles is that Trematon could look to bulking up Aria with more selected acquisitions, and then take the enlarged subsidiary to the JSE as a specialised property vehicle.

Logistics sector specialist Equites Property, which has lately made significant investments in the UK, recently reported encouraging news for its new Epping facility. At the end of 2015 Equites pursued a speculative development at 160 Gunners Circle in Epping, constructing a 8,000m2 cross-docking distribution centre at the end of August last year.

Equites development pipeline looks exciting for 2017. The company has developed the Africa head office and lead distribution centre at Atlantic Hills in Durbanville for the global footwear and apparel company, Puma.

Equites is also honing its portfolio in order to focus solely on the logistics sector and has started disposing its handful of commercial office properties. Equites will reinvest the proceeds of these disposals into higher growth logistics assets.

Sales agreements for its Belvedere and Execujet office buildings in Cape Town have already been concluded.

Most encouraging is that Equites’ industrial portfolio remains fully let, as well as a 100% tenant retention rate.

In its latest annual report Equites management forecast further robust demand to conclude further development leases on its existing land to add to its existing pipeline. Interestingly, Equites management also believe that a limited exposure to “speculative developments in the right locations” can contribute positively to value being unlocked through developments.

Equites also confirmed it would pursue opportunities to acquire logistics properties that meet its investment criteria and that would contribute to long-term, predictable distribution growth.

Just before the end of 2016 Storage specialist Stor-Age acquired Western Cape-based rival Storage RSA for R297m, as well as Unit 1 of the Somerset West Business Park.

The Storage RSA transaction will see Stor-Age increase its trading portfolio markedly through the acquisition of an additional 39,869m2 of gross lettable area from five trading stores. These include storage properties in Stellenbosch, Somerset West and Durbanville.

The Somerset West transaction – valued at R40m – will give Stor-Age an additional trading store with a gross lettable area of 5,500m2.

Gavin Lucas, Chief Executive Office, Stor-Age says Storage RSA presented a rare opportunity to buy South African self-storage properties that complement the location, scale and quality of Stor-Age’s existing portfolio.

“The acquisition is in line with the group’s strategy of consolidating its position through value-add acquisitions in a fragmented industry.”

Looking ahead to 2017, Lucas said the short to medium-term focus would remain on driving occupancies, revenue and cash flow from all properties and bedding down the RSA portfolio.

“Our acquisition strategy is underpinned by a healthy balance sheet and we are well positioned to weather the economic headwinds in South Africa, as well as global market volatility.”