SAPOA 2008 Citichat 30 May 2008

CITICHAT 21/2008 - 30 May 2008


SAPOA Conference 2008

Spent yesterday at the Annual SAPOA Conference in Cape Town. It’s many years since I attended one of these – the last occasion was probably about seven or eight years back when I was invited to speak about the future of the Johannesburg Inner City. At that stage, it represented massive losses and provided no economic future as far as most of the then audience of property developers and property owners was concerned. I think I may have been a bit rude to them regarding their skepticism and their somewhat hostile attitude to the inner city, hence probably only being invited back now! This time it was to sit on a panel focusing on “Safer Cities, Safer South Africa: Remedy to Crime the New York way.”

The Conference was held at the Cape Town International Convention Centre (CTICC). Although built in 2003, this was my first visit to this particular facility. It is as good as anything I’ve seen in many other cities in the world and, in fact, better than many. Last year, 2007, the Centre recorded a turnover in excess of R100 million and made a significant contribution to job creation both direct and indirect. Over 45 000 international delegates were attracted to the centre last year which also recorded the highest number of visitor days since opening, 1 242 000. (number of delegates x conference days) of which nearly 250 000 were international delegates. Surveys have shown that “international conference delegates spend on average R2 400 per delegate per day on registration, accommodation, local travel and transportation, gastronomy and souvenirs.” The macroeconomic effect of the CTICC is measured in terms of its contribution to the South African GDP – an amazing R6.86 billion over the past five years with foreign exchange earnings of nearly R1 billion from 2004 to the end of their 2007 financial year. They evidently have great expansion plans which will quite dramatically increase the space they occupy and thus the facilities they can offer. There can be little doubt that the lack of a facility of this standard and size is a negative for our inner city. Convention Centres in Sandton and Midrand do not bring much or any value to the inner city itself. Ah, but I can hear many thinking, “Cape Town is Cape Town, an inner city venue in Johannesburg would not be able to compete!” I don’t believe that, never have – over time we could offer something special, we certainly have unique experiences on our doorstep for delegates and their partners to visit. Yes but the xenophobia? Well, I learnt that Cape Town has just as many displaced people as we have.

So what does the cream of South Africa’s property industry discuss when they come together en masse? This year Economic Development; Emerging Markets Perspectives on Development and Retail; Foreign Land Ownership; Safer Cities; Delivery and Capacity. All highly pertinent to where the property industry finds itself. Due to arriving a bit late, I missed the keynote address by Tom Boardman, the CEO of Nedbank, but I believe it was very positive, as keynote addresses generally are, and partly centered around the issue of leadership in turn-around situations such as his company has been experiencing. There wasn’t a copy of his address available, but I believe it will be on the SAPOA webpage at the end of next week for those who may be interested. Anyway, Nedbank was of course one of the major institutions that fled the city having built a multi million (if not billion) rand edifice in umlungustan as would truly befit a prestigious financial institution. That was of course before Boardman’s appointment. Leadership in turn-around situations?, hmmm, wonder what he would have done about the location of their head office! It could have been a double whammy, a business turn-around occurring in parallel with assisting a city turn-around.

I was in time for a panel discussion entitled “Harnessing the Property Sector for Economic Development” which was introduced by Sizwe Nxedlana, the property economist at Standard Bank (Standard didn’t flee the inner city but stayed and continues to pump in investment!) His short term forecasts for the economy were as dismal as one would expect and clearly things will get a lot worse before they get better. He seems to see just post-2010 as being a possible tuning point. I’ve always wondered if just post-2010 won’t be stagnant as all the major 2010 capital investment comes to an end, but he’s the economist. One figure that stuck in my mind from his presentation was that in the past four weeks 23 of every 100 persons looking for a job were unable to find employment – put that way our unemployment issue becomes a much more stark reality. Interestingly, the profile of this group is ‘young, black, mainly female and generally uneducated’. That makes me realize again how little we have been able to dent the unemployment issue over the past fourteen years and that lack of education is so key in unlocking the problem.

Panelist, Manye Moroka, the Director General of the National Department of Public Works, gave an interesting answer to an irate property company who was querying the short length of leases (two years) that the Department were now negotiating. Evidently the new policy is that the length of lease is determined by your company’s BEE status – the higher the BEE holding the longer the lease!

I wanted to ask him what his department was planning to do with their decaying buildings that blight many of our cities such as the old Police Barracks in Marshall Street. Before I could do so, he said that the Department had just finished a detailed examination of every building in their R100 billion property portfolio and had developed a policy regarding improving the use of various buildings as well as disposing of others. The policy is just waiting for the signature of the Minister. But I’ve heard that story for a long, long time!

A particularly interesting session was on an “Emerging Market Perspective on Development and Retail – Dual Realities and Challenges.” Two scenarios were presented – one of India and the other of China. The two speakers were Rajnish Changrani, Vice President of Equity Investments of a company called Red Fort Capital in India and Martin Wragge, Director of Cobrole, Ltd. Martin is better known in South Africa as the erstwhile developer of Canal Walk, Century City, Ratanga Junction and Tyger Valley Centre all here in the Cape than as a developer in China.

Both presentations were thought provoking. Rajnish Changrani explained why his large investment company does not invest in retail in India. Evidently, some 95% of all retail in India is single, stand-alone shops usually family owned. The other 5% is in malls. Malls however tend to be a series of shops disconnected from each other and parking is usually not provided. The very high cost of land makes rentals un-affordable other than by the anchor tenant. As a result, a number of malls are being recycled into other activities. The development sector in India also faces major challenges such as no clear cut evidence of land ownership; rapid urbanization involving many millions of people (20 million condominiums are required over the next 10 to 15 years!); a huge shortage of skilled labour; and, again, the very high land prices. All of this results in unaffordable sale prices or rentals. He stated that there are very few ‘good deals’ where land title is in place; plans prepared and skills available. Corruption is clearly a major issue – of one Rupee set aside for infrastructure, only 0.15 finds its way ultimately into the project, the balance generally into the pockets of others, particularly politicians!

Much of the land is not generating enough to sustain the population. In Kolkata, a number of PPPs are introducing a new approach to land reform. Farmers are being persuaded to give up non-generating land in return for a shareholding in the development on their land. The profits generated by the development thus become their income, making it beneficial for them to give up their land and results in poor farmers becoming real stakeholders in the country. I have always said that the urban revitalization of the inner city will never be complete until there is an equitable distribution of the ownership of property. I therefore related to Rajnish’s comments and those made by one of the panelists in the previous session, Wayne van der Vent, head of Investments at PIC, who said that the previously disadvantaged have been bricklayers, carpenters, tea ladies and security guards in the property industry for far too long and now is the time for them to be included as real stakeholders in the economy.

China, population 1,3 billion, has 660 cities of which 100 have a population of more than a million. Twenty million people a year are moving to the cities – Shanghai will grow from 20 to 80 million within a short space of time. The current 190 000 kms of expressways will be increased to 370 000 by 2010! The mind boggles at the rate of growth, however, as became clear from Martin Wragge’s presentation, China represents an “enormously complex” market.

Martin Wragge was part of a non-property delegation to China in 2001. However, in a city of about 1.5 million people that he visited, he noticed that the city was divided into two distinct areas with a large, 180 ha. piece of farm land between the two sections. He sensed that the farmland was going to become the centre of development at some stage in the future and that the right development, now, would accelerate this trend. Within four days he had tied up a “deal” with the City Council to basically evict the two thousand farmers and develop substantial residential accommodation, small retail and park facilities. The eviction was done with 24 hours notice before commencing to demolish the houses. In essence he would build a 100 ha. park which would be handed back to the City Council for use by all residents in exchange for which he would retain the balance of 80 hectares for basically high-rise residential development and a small retail facility. One year later he was breaking ground and has completed a substantial number of units, the park and is now busy constructing the retail and a 21 storey office tower. These latter were “imposed” on the development for political reasons. He described the difficulty of the process and the high level of political involvement and demands for facilities that were just not logical nor economic.

Of course the eviction of the 2000 farmers created quite a stir at the conference. Wragge’s justification - “ 2000 farmers were living on the ground and not using it – in ten years time they’ll still be there not using it.” However, it later transpired that the evictees were not left without accommodation. Wragge lauded the dynamic leadership in China at all levels of government that has resulted in its robust economy. There are no squatters or low cost developments – if the farmers were evicted then they would have been appropriately relocated “the city takes care of their own” He pointed to the squatter camps that line the drive from Cape Town airport to the city stating that this would just not be acceptable in China. “In China they do what is necessary to go forward – here we are held hostage by people who have no idea of economics and what is need to be done”

This approach led to a question from the floor as to whether the panel was suggesting that development could only take place in countries like China where people could be summarily moved off the land and where there was a high level of political meddling and corruption!

The third panelist in this session was Ian Watt, better known to most as Head of Old Mutual Properties but now in a new position that bears the imposing title of “Innovator in Chief - Retail Xpressions”. He made some interesting comments from his extensive international exposure. South Africans developers/ property investors tend to think that all the problems that they experience are unique to the country, he said. Wherever you go, the problems were all similar to what we are experiencing in South Africa. For instance, in Italy, all Bulgarian workers have recently been sent home but the world doesn’t shout ‘xenophobia’; in India you get 30% of the water you apply for, and there are constant blackouts. And, as we heard, corruption is rife. There are complex developmental issues in China and in India hardship is a part of daily life. Yet, everyone in those countries does not go about in a mood of gloom and despair. They get on doing what has to be done, often in conditions far worse than we can imagine. He suggested that we should be far more entrepreneurial than we are.

The SAPOA annual award for Innovative Excellence in Property Development in the category ‘Office Developments’ was won by Turbine Square Newtown which also was awarded the Overall Sapoa Award for Innovate Excellence. Yes! Joburg Inner City scores again!

A good first day at the conference with lots of issues to chew on, regards from a wet and blustery Cape Town, neil