ONE has to wonder why the V&A Waterfront, an iconic retail and leisure property in SA, has changed hands so quickly.

The Dubai-based consortium that acquired control of the Waterfront in a R7 billion deal in 2006 has sold out scarcely five years later. Property is normally a long term deal.

In fact one might reckon the Waterfront – which is a sprawling and expensive property - surely would require at least a 10-year investment period before an investor could really eke out a meaningful return.

At first glance the consortium – headed by Dubai World – would appear to have flipped the Waterfront profitably. After all, the new owners – property giant Growthpoint and state investment organ the Public Investment Corporation (PIC) – forked out nearly R10 billion.

That would be a clear profit of nearly 30% - but one should take into account the fact that the consortium spent extensively on upgrading various Waterfront facilities during its tenure as landlord. In this regard around
30 000 sq m was added to the Waterfront between 2006 and 2010 - including the
22 000 sq m Link Mall extension to Waterfront shopping centre, Breakwater Parking Garage and one new hotel (Sol Kerzner’s One & Only).

While it’s difficult to quantify the capital expenditure, Dubai World had indicated that it would spend at least $1 billion (R7 billion) on developing ‘Africa’s Riviera’ before the 2010 World Cup.

Perhaps the World Cup – although a resounding triumph for the South African psyche – did not fill the coffers to the levels initially anticipated. Certainly recent financial results from a number of leisure and retail players don’t exactly show booming World Cup bonanzas at bottom line.

With this in mind it is perhaps possible to conclude the Dubai-based consortium – of which certain segments were rumoured to be mired in debt – exited the Waterfront with more dignity than actual profits.

One can only assume the Dubai consortium’s debt was heavy, because it would seem the sellers have sacrificed some rather attractive yields as well as promising development potential. The new owners - Growthpoint (the biggest real estate fund on the JSE) and the PIC (which manages money for the multitude of state employees) - look poised to score handsomely from the Waterfront in the medium to long term. Some figures cited in a Growthpoint presentation are quite startling, and put the latest price tag in perspective.

Growthpoint pointed out that the Waterfront had ‘virtually doubled’ its earnings before interest and tax in the last four years.

The value of the Waterfront’s developed properties was set at R8 billion with a yield of around 7.3%. While the yield is a slight premium to SA’s bigger property counters on the JSE it is important to realise how the yield has grown in the last few years (as well as the scarcity value of the asset). In 2006 the yield was a pedestrian 4,6% and in 2007 it was still languishing at around 5.3%.

The Dubai crowd certainly ratcheted things up during their tenure, which again begs the question of the consortium giving up so much potential upside. One can only conclude that debt is a real party spoiler.

Growthpoint’s presentation shows that in financial 2011 the Waterfront’s rental stream should be nearing the R700 million mark with earnings before interest and tax coming in well over R550 million.

While the rental streams are attractive even if modest lease increases are instituted over the next few years, the big upside for Growthpoint and the PIC could come from the sizeable swathe of undeveloped land at the Waterfront.

There is as much as 220 000 sq m bulk left for development at the Waterfront – which is a sizeable chunk of real estate considering the developed segment is around 384 000 sq m.

It will be interesting to see if Growthpoint and the PIC opt to develop this land in the short-term or prefer to wait for more buoyant economic conditions to first materialise.