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V&A Waterfront: Why were foreigners the highest bidders?

Tuesday, October 10, 2006

So, if the Victoria & Alfred Waterfront is such a valuable asset, why weren’t local companies outbidding their foreign counterparts to keep it in local ownership?

Unpacking the winning bid of R7,04 billion leads one to two possible reasons for the winning investment offer, says Erwin Rode, CEO of Rode & Associates property economists and valuers. When one deducts from the value of the V&A Waterfront deal the project’s undeveloped bulk - approximately 45% of total granted development rights – the remaining income yield is less than 4%.

The question that immediately comes to mind, is how such a low yield can make this a feasible investment proposition?

Rode agrees that if one compares a 4% income yield with the 7% recently paid for the Cape Gate shopping centre, for instance, the Waterfront sale price may seem puzzling at first.

He explains that the investment decision was likely motivated by the same reason local companies like Investec and Old Mutual are listing on the London Stock Exchange – the hurdle rate (or cost of capital) of first-world countries is significantly lower than that of developing countries like South Africa.

“Considering the South African currency risk premium of 2,5% and sovereign risk premium of 1% (as at 2006:1), a capitalization rate of less than 4% still seems rather low. ”

Hence it is likely that the overriding motivating factor was a plan by the foreign investor to aggressively develop the V&A’s undeveloped bulk. In contrast, most local companies probably took a longer-term view. The winning bidder thus may have taken the view that development profits would cross-subsidise the income-producing part of the V & A Waterfront.

With the office propery market at the dawn of a major boom, and the residential demand in the Waterfront arguably less cyclical than the mainstream residential property market, an aggressive development approach may just pay off.

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