No turning back for South African real estate

Copyright: David Lawson first appeared Property Week March 1999

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Rumours that Peter Mandelson will advise the ANC in this year's South African general election will add an extra dimension to European interest. Legendary skills as a political persuader combined with ideas and contacts picked up in his stint as Britain's industry minister could be just what the country needs.

Africa's richest nation has avoided the decline into authoritarian anti-capitalism some critics predicted when Nelson Mandela swept to power. A second term, this time under successor Thabo Mbeki, will be more difficult, however, as the economy wavers and the Rand sinks.

But Ian Watt, managing director of Old Mutual Properties, believes there is no turning back. 'South Africa has too many vested interests in business and its capitalist economy,' he says.

Meanwhile Old Mutual, the country's largest life assurer, is looking outwards. It has just won permission for a listing on the London stock exchange when mutual status is dropped later this year. With a likely market value of more than 33bn Rand (3.3bn pounds) it will go straight into the FTSE 100, focusing European investors' interest. The property arm OMP has also been reorganised and aims to win business as a manager in South Africa for overseas investors.

The subsidiary has been split into three divisions handling property management, asset management and development. Gavin Dold, head of asset management, said the aim is to double property funds under his control to 20bn Rand within five years. The same skills managing Old Mutual property funds will be offered to other funds looking for a niche in this market.

These are still early days for both company and country, however, as overseas money has had only since 1994 to adjust to the new regime. The Malaysians saw an opportunity a couple of years ago, spending more than 1bn dollars on schemes such as the commercial and leisure development along the Vaal river, south of Johannesburg. But troubles at home have slowed their involvement.

Private European investors, particularly the Germans, have been another new force, buying property ranging from vineyards to office blocks, but institutions are still playing a waiting game. One factor which will help raise interest is the launch of a South African index by the London-based Investment Property Databank. This will give funds a trusted benchmark. Another is the weakening Rand, which is reducing property prices relative to Europe.

OMP already has more than 50bn dollars (31m pounds)worth of assets under management but still sees big opportunities for filling gaps in South Africa's retail sector, which has not kept pace with growth abroad.

A three-year development programme worth 1bn dollars is aimed at tapping a burgeoning middle class and rising retail sales. These include:

These developments, along with expansion and upgrading of existing centres, will add 140,000 sq metres of prime shopping space to the portfolio. The Rosebank complex in Johannesburg will be the first urban entertainment complex in the country, with an 1800-seat cinema, restaurants and music stores anchored by Woolworths, which has a high-quality.

CB Hillier Parker, which is using its worldwide network to draw in overseas interest, says South Africa is a key location for expansionary European retail chains facing limited growth in their home markets. At just over 100sq metres per 1000 people, shopping provision is less than half the average in countries like the UK and France, and a mere 6% of that in the US.

Watt points out that shopping centre yields have risen over the last 18 months but it remains the most popular investment class because of rising rents, particularly in regional and community centres.

OMP also has substantial holdings in other property sectors in its total portfolio of more than 3.5m sq metres, including business centre offices. Cape Town is a favourite for office investment but yields have weakened in the last couple of years. Decentralised offices, however, have strengthened.

A further phase of stable government, a weaker Rand, rising rents and a return to stronger economic growth in 2001 are expected to draw institutional investors. South Africa is still classed as an emerging market. If the economy recovers and political stability continues, within a few years it could finally win promotion to rank with established property investment locations.