Investing In Perception: Developers Value The Space In-Between

18 May 2018 | SA Views | Alan Cameron
 


"There is an argument to be made, that you can, to some extent, control land values if you control a larger area," says Martin Kearns, Development Executive at the V&A Waterfront.

In 2011, Growthpoint and the Public Investment Corporation together bought the V&A for R9.7 billion. Seven years later, the total value has increased to R14.4 billion, and property values within the V&A grow consistently quicker than Cape Town’s other stellar high-growth areas, the CBD and the Atlantic Seaboard.

Tracking the share price and financial statements of listed property groups like Redefine and Growthpoint will reveal the relative dexterity of the property sector in weathering the squalls of international interest rate hikes, or even the furious storm of national resource mismanagement under the Zuma government.

What it often does not show is the nuance at play in development decisions in large, privately-managed precincts like the V&A or Century City, as well as site-specific developments like Loftus Park and Rosebank Link.

Benefitting from a sustained demand

Sustainable development is a key principle for many developers. Says Kearns, "We epitomise the adage, ’reuse, reduce, recycle’ in the way we breathe new life into old buildings through design and retrofits and also, in the way we focus on good and varied architecture for new buildings." And this focus, on aesthetics and green buildings, helps to ensure that the buildings work from a financial point of view.

Matching supply to demand is also a tool used to influence land value among precinct developers, and so not flood the market which erodes value. "A mixed-use development, like Century City, helps us respond to the varying economic cycles of residential, offices and retail," comments John Chapman, a director at the independent Rabie Property Group. Targeting three different, yet complementary, target audiences for developments within the same precinct help hedge the investment as the strong performers carry the weaker ones.

"A further big advantage of these large-scale developments is that one is in it for the long haul and so can incrementally add value through landscaping and infrastructure, which reaps increasing returns as the development matures," said Chapman.

Beyond the increased rentals and energy efficiencies demonstrated in Green Star-rated buildings, incremental improvements like retrofits have enabled the V&A Waterfront to firmly establish itself as a green precinct, reducing the demand for electricity by 35%, water by 25% and recycling 50% of waste.

’What drives value is the space between’

Interestingly, Kearns observes, "What drives value is the space between [the buildings]". When developing, he explains, the V&A looks at how each building relates to its neighbour, and the space in which it sits, to ensure it does exactly that. "Then we get the benefit of individual uses as well as how it relates in a complementary fashion to the neighbourhood," he notes. Using this strategy, pedestrians flow much easier between key points in the precinct and so stimulate the areas between.

The V&A’s value is largely because of the way the area was developed and controlled post-development, says Kearns, "therefore, it attracts a different level of purchaser and investor. The ability to control the infrastructure, the building and space between means that the whole is greater than the sum of the parts."

A mixed-use development’s client book will reflect this synergy, attracting corporate tenants who are focused on staff attraction and retention. The convenience for firms’ employees to casually walk to the facilities and amenities of the centre, interesting enough to attract and entertain clients, is a real advantage - as is the opportunity for staff not needing to commute to their own staff events, explains Kearns. "It’s not just those who work here that enjoy meeting up with their families after hours to enjoy the beachfront, those who live here also see the value of it."

Read more: Should I buy listed property or physical property? Part 1 and Part 2

Walkability is a major benefit for developments

And Chapman agrees. "A major benefit of a mixed-use development such as Century City is its walkability - almost every imaginable facility is in walking distance, from shops and sports clubs to churches and weekend markets. Elevating pedestrians over cars unlocks this opportunity, whereas this tends to be the opposite in other areas."

"Mixed-use developments create environments with energy. These areas don’t become ghost towns at night or over weekends. Rather they offer a pulse and excitement 24-7. With this 24-hour life, comes increased public surveillance and with that improved safety and security."

Rosebank’s walkable neighbourhood design is one of the key reasons why it presently commands higher rentals than Sandton. "A large tenant recently studied the two suburbs for their employee value proposition, and Rosebank has clear advantages. It’s a friendlier environment, walkability is high," said Mike Ruttell, Development Director at Redefine Properties.

"This is something we’ve taken advantage of with a recent Rosebank development, encouraging the link with public transport nodes by lifting the development above the ground so that you can walk under it," Ruttell said. The Rosebank Link’s open ground-floor pedestrian environment features retail within it, and leads out to more around the building.

"As time becomes increasingly pressured, we’re going to have less time to make life work," Ruttell notes. "We place developments in key nodes because it enhances access to staff, of all levels. This convenience increases productivity for companies." Both of Redefine’s new developments, Loftus Park and Rosebank Link, are nearby Gautrain or Metro rail stops, as well as the bus rapid transit routes.

Before buying, first look at these indicators

When looking to invest in a development, Chapman notes that helpful indicators to look out for in residential properties are their rentals and capital appreciation in the precinct relative to other precincts. He advises, "Ask, is there a demand from tenants and are rentals providing a return on investment?"

With commercial property investment, Chapman says it’s helpful to look at the present rentals and if they are offering returns, at the trajectory of vacancy levels over time, and also the supply pipeline to see if there is a lot more competing development planned in the near future.

Kearns points out that making money from the building is a mix of how much of the building you construct verses the amount you can use. "The benefit of having decentralized car parks is that they can serve office users during the day and leisure users after hours and on the weekends. This countercyclical use is beneficial."

"Sometime we choose to have less efficient buildings from a space point of view because we want a certain environment. Creating wide atria and internal public space allows for a better flow of people across the precinct," Kearns concludes.

The concept of this ’better flow of people’ through convenient pedestrian access is something that local authorities would do well to continue consider around Sandton, and other development nodes, where inaccessible traffic grid-lock discourages using the environment, and so deters investors and developers alike.

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Alan

Alan Cameron

Alan Cameron is an independent stakeholder management consultant working from Cape Town. Follow him on Twitter: @cameron_an.


Disclaimer:
The information contained in this article is for informational purposes only and must not be regarded as a prospectus for any security, financial product or transaction. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial issue. Investors should consider this research/article as only a single factor in making their investment decision. We recommend you consult a financial planner/advisor to take into account your particular investment objectives, financial situation and individual needs. The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Sharenet.

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