EXTREME HYPE - OOHHHH this is going to end badly.

The Property Prance
04 Jul 2007 - Finweek -
IntroSome of the wealthiest property investors in Britain, Europe and the Middle East have hit town ready to bulk up their global portfolios with large investments in prime South African real estate
The bigger players have billions to spend. And they're not averse to aggressively outbidding South African buyers for what they perceive to be highly undervalued commercial and leisure property assets. First prize for most of those investors is to buy directly into single, mixed-use developments that offer a combination of retail, office, hotel and residential opportunities - deals that have the potential to become another V&A Waterfront, Century City or Melrose Arch.
But some are also making a play for JSE-listed companies with sizeable underlying property portfolios: gaming/hotel operators and corporates alike. Foreign investors aren't necessarily interested in the core businesses of such companies - it's more about stripping out the underlying property assets. Talk is that a number of offshore players are keen to get their hands on the large tracts of undeveloped land owned by the likes of Tongaat-Hulett and AECI.
To date, the biggest single property deal in SA involving foreign investors was the sale of the V&A Waterfront to British-based London & Regional Properties and its Dubai partner, Istithmar PJSC, in September last year for R7bn.
Both London & Regional - recently rated by the London Financial Times as the biggest privately owned property company in Europe, with assets of around R100bn - and Istithmar want to increase their exposure to SA property.
Finweek hears that London & Regional is already negotiating an offer to buy another iconic SA development: Melrose Arch. Industry insiders place a value of at least R3bn on the trendy, mixed-use precinct just off the N1 north of Johannesburg.
London & Regional is also rumoured to be one of the suitors eyeing listed casino/resort operator Gold Reef Resorts. Earlier this year, London & Regional was involved in unsuccessful talks with Peermont Global, another SA gaming/hotel operator.
Gold Reef Resorts recently said that it was in talks with three or four "selected" parties that could result in a buyout offer for the entire company. Mvelaphanda chairman Tokyo Sexwale, together with Durban-based businessman Vivian Reddy and US-based casino group Harrah's, are other likely bidders.
Casinos in the Gold Reef stable include Gold Reef City (south of Johannesburg), Garden Route (Mossel Bay), Golden Horse (Maritzburg), Goldfields (Welkom) and a majority stake in Casino Mykonos (Cape West Coast). The deal is estimated to be worth R10bn. It will be interesting to see to what extent SA buyers will be prepared to match or exceed the bids of their offshore competitors.
Meanwhile, Dubai-based Istithmar subsidiary Leisurecorp earlier this month announced it had bought Pearl Valley Signature Golf Estate and Spa in the Cape Winelands. Leisurecorp isn't disclosing what it paid for Pearl Valley or how much it will spend to turn the 170ha development into a major international golfing resort. However, Leisurecorp CEO David Spencer says the acquisition was a "significant" investment, both in terms of the initial price paid and the development plans it hopes to implement.
Spencer says it's likely that Istithmar and its real estate investment arm will be involved in more deals in SA. Says Spencer: "SA is currently one of our leading target markets, partly because of the growth in the country's leisure and tourism sectors and partly because of the boost we expect from the 2010 Soccer World Cup."
Lehman Brothers, one of the US's biggest investment banks and asset managers, has also recently entered the fray via a joint venture with JSE-listed Madison Property Fund Managers. Though the deal hasn't yet been officially announced, a large tract of land on the outskirts of Cape Town has apparently been bought for R500m to develop a mixed-use retail, office and residential precinct comprising bulk space of at least 100 000sq m.
Then there's Kuwaiti developer IFA Hotels & Resorts, which is expected to announce a major acquisition within weeks. It's not unlikely that IFA has its sights on AltX-listed golf estate developer Acc-Ross.
IFA's SA-listed arm already owns stakes in other golfing estates, including Zimbali Coastal Resort (near Ballito on the KwaZulu-Natal north coast) and the Cape Winelands estate Boschendal. IFA also recently entered the Namibian hospitality market in a R550m joint venture with Ohlthaver & List.
Other foreign players include Irish developer Howard Eurocape, which is ploughing R500m into the mixed-use Mandela Rhodes Place in Cape Town's CBD. Offshore private equity funds are also starting to tap into SA's commercial property market.
An Irish consortium recently appointed SA corporate finance outfit and designated AltX adviser Bridge Capital to place around R1bn in directly held office, retail and industrial buildings. Ron van der Bos, who together with Tobias Hegele and Jeremy Clark head Bridge Capital's property asset management division, says they've already bought stock worth R300m on behalf of that client. They're in the process of setting up a second fund for the same Irish client and are involved in talks with other British and European offshore consortiums to set up similar property investment funds.
The list goes on. But why the sudden surge in interest in SA's commercial and leisure property assets?
"It's simple. In global terms our market offers value. And with so much offshore money looking for a home, it was only a matter of time before foreign property investors would turn to SA,'' says Arnold Meyer, ex-Broll CEO and recently appointed MD of London & Regional's Africa operations.
Meyer says foreign players have different perspectives on extracting value and structuring transactions. "So foreign players such as London & Regional view SA as a long-term buy."
That does perhaps suggest why international investors are prepared to pay more for prime properties (think V&A Waterfront) than their SA counterparts.
Meyer won't confirm whether London & Regional is bidding for either Melrose Arch or Gold Reef Resorts, except to say that it's involved in "various discussions with various parties". Though London & Regional is a major player in emerging economies, including Poland and Russia, its 50% investment in the V&A Waterfront was its first acquisition outside Europe.
Meyer says SA, and Africa in general, offer double the growth potential over the next five years than any European property market. He says it's likely that London & Regional could have 20% of its assets in Africa within five years.
Craig Ewin, CEO of Old Mutual-managed SA Corporate Real Estate Fund, says there's no doubt that international property players are increasingly looking at emerging markets as the risk profiles of developing economies improve. Ewin says the general view is that international investors can no longer afford to ignore high growth opportunities in emerging economies.
Says Ewin: "South African real estate offers a huge value proposition. Investment Property Databank (IPD) performance figures show that SA's direct commercial property has outperformed all international markets over the past three and five years. Yet we still offer an average income yield that is 200 basis points higher than any other market included in the IPD benchmark."
Madison Property Fund Managers executive director Mike Flax holds a similar view. He says offshore developers regard SA as cheap compared with other emerging markets. "International investors believe SA is now where Poland was five years ago." Flax says in recent years foreign investors have poured billions into Poland's previously underdeveloped commercial property market, unlocking plenty of upside in the process. The same is bound to happen in SA.
Flax says the V&A Waterfront sale has been a major catalyst for further money flow into SA. "The world has suddenly been forced to stand up and take notice of SA."
But it's not only perceived value that's luring more foreign property players to SA's shores. Phillip da Silva, vice-president of operations for IFA Hotels & Resorts in Africa and the Indian Ocean, says SA's highly developed transport and tourism infrastructure is a major plus for international hotel and resort developers.
So too is security of tenure. For example, Da Silva says that SA is far more attractive than Zanzibar or Mozambique, where property investors can't obtain freehold title.
Van der Bos says that SA's well-developed legal and financial framework should also not be underestimated. Even the language factor plays a role. For example, Van der Bos says German investors feel more comfortable entering an English-speaking country such as SA than neighbouring Poland, where language is a barrier.
However, industry commentators agree that the one factor that could slow the offshore scramble for SA property is a growing shortage of investment stock. But that could prompt more overseas investors to go the indirect route via listed property loan stocks and property unit trusts.
Although some may bemoan the fact that SA's crown jewels are increasingly finding their way into foreign hands, Growthpoint Properties CEO Norbert Sasse says the pros of offshore participation far outweigh the cons. "Increased foreign competition for prime SA property assets will help put us on the map as a preferred global investment destination - which can only be positive for our real estate market." Sasse says some of these international players have the vision, money and skills to turn underutilised assets into world-class developments.
But there's also no doubt that foreign interest will push SA property prices up. Flax says increased competition for SA property - both physical and listed - will result in higher prices and lower yields. "However, the positive spin-off is that the expertise that international players bring to SA can only sharpen the skills of our players."
Ewin agrees: "More international investors vying for SA property must affect prices. But if SA wants to play in the international environment, we can't bury our heads in the sand and think we're still going to control our own market."