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Did Absa price the Diagonal Street Diamond right?

Monday, February 5, 2007

In a landmark transaction, Absa bank recently bought 11 Diagonal Street in the run-down Johannesburg CBD for R104 million. It paid a further R20 million for the nearby West Street parkade. “At first glance, this seems like a lot of money for 32.600m² in a CBD like Johannesburg,” says Erwin Rode of Rode & Associates. Did the bank overpay?

To test this, the Rode team modelled the price paid, making certain assumptions.

“For starters, we must of course consider that the bank will occupy 50% of the building itself,” says Rode.

Assuming a capitalization rate of 11%, a long-term vacancy rate of 20%, and a gross rental rate of R57/m², the model spewed out a value equivalent to the price. “Maybe the R57/m² is on the high side, but considering the alternative of hiring outside the CBD, this seems to be a price that should satisfy both buyer and seller,” concludes Rode.

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