Opportunities from Gautrain’s coming R50bn expansion – fancy a flat in downtown Boksburg?

There’s been much speculation after the news that Gautrain will at least be doubled in size over the next few years. So we asked two people who should know – Gautrain’s Jack vd Merwe and Cannon Asset Management’s Geoff Blount – to guide us through the likely developments and what opportunities for investors. It ended up being a fascinating conversation, with some rather specific advice. – AH  

To watch the video on CNBC’s Power Lunch, click hereGautrain

GUGULETHU MFUPHI: The Gautrain Management Agency has announced expansion plans for the rail system, which will eventually extend to Boksburg and Soweto.  Other investment opportunities are already being explored with regards to this plan.  Joining us now to discuss this is Mr Jack van der Merwe who is the Chief Executive of the Gautrain Management Agency, as well as Geoff Blount from Cannon Asset Management.  Jack, let’s start with you.  You have managed to see great success of the Gautrain even though there was lots of scepticism in the beginning.  I understand that you are several years ahead of schedule.

Jack van der MerweJACK VAN DER MERWE: Yes, it has worked out quite well.  The public has taken to it like fish to water. I have never had a customer say he doesn’t like it, so it is going well.

ALEC HOGG: But last time we had your colleague (Errol Braithwaite) in here, I wrote a very glowing story about it, I got Max Gebhardt from the Financial Mail saying that the Gauteng taxpayer is subsidising the Gautrain.  So, kind of pricked my bubble.  What is going on Jack?

JACK VAN DER MERWE: Remember the infrastructure cost is a sunken cost but the idea is that we would run the train, and the fare box would cover the cost.  We have been running the system now for sixteen months – since the 8th of June last year. We are now covering the operating costs but there are still the loan repayments.

ALEC HOGG: So, you are ahead of schedule.

JACK VAN DER MERWE: We are ahead of schedule and we will, within the next five to six years, be at a point where we will cover all the costs from fare box and that is what the intention was.  The intention was never to do it from day one.

ALEC HOGG: What is ‘fare box’?

JACK VAN DER MERWE: Fare box is the revenue we get from the commuter plus the value of advertisements.

ALEC HOGG: So, it is the money I am paying on my card, that eighteen bucks when I come from Rosebank to Sandton that will cover all the operations.

JACK VAN DER MERWE:  That will cover all the operational cost.

ALEC HOGG: That’s pretty good going.  What is the total capital cost?

JACK VAN DER MERWE:  27 billion rand.

GUGULETHU MFUPHI: Was that originally forecast?

JACK VAN DER MERWE: That was approved as a PPP project )public private partnership) and that was the original forecast.

ALEC HOGG:   Did Murray & Roberts ever get their money?

JACK VAN DER MERWE: No, the court process is a slow process, so we are in the process and we will see.  Maybe two or three years from now we will get a final hearing.  But they have got the tendered amount.

ALEC HOGG:   Jack, R27 billion and it is an 80-kilometre line at the moment.  You are talking about another 140 kilometres. Is it a similar kind of increase?  R40,50 billion – is that what it will cost?

JACK VAN DER MERWE: Yeah, but one has to put it into context.  The provincial government embarked on a 25 year integrated transport master plan and if you do future planning, there are really three things.  What will the economy do?  What will the population do? And where will they stay?  So, we have predicted 18.7 million people, in 25 years’ time, but very importantly, 8.6 million workers. That gives you 8.6 million home-work trips and then 8.6 million work-home trips. In total, we will be handling about 25 million passenger trips per day in Gauteng in 25 years’ time.

ALEC HOGG:  As against?

JACK VAN DER MERWE:   As against – at the moment, around about 6 million.  So, it is really a massive jump that we are going to have, and we will do three shifts.  You have to move from motorised to non-motorised transport.  You have to move from private car use to public.  You have to move as far as possible, from road to rail.  In this plan there is an area between Tshwane and Johannesburg and Ekurhurleni.  That is where we want to put the bulk of the people, and that then makes it an ideal place to put in a backbone rail.

ALEC HOGG: Gugu, before we talk to Geoff, because we have to see the  investment side as well, on one of our morning conference discussions our colleague David Williams was saying the Gautrain is all very well, but after you get off one of their busses it takes an age for a municipal bus to come along. Do you use Gautrain much?

GUGULETHU MFUPHI:   I use the Gautrain.  Very often the airport route, Sandton to the airport.  Unfortunately, it doesn’t go far south enough, Jack a nudge over there, for me to actually take it from home. You have the luxury from Rosebank don’t you Alec?

ALEC HOGG:  Yeah. Why isn’t it going south?

GUGULETHU MFUPHI: I guess that moves to your area selection.  Why chose a place like Naledi in Soweto instead of Vereeniging?

JACK VAN DER MERWE: Well actually, if one looks at where we are going to place the population, there is a need from the eastern side of Tshwane, coming from Mamelodi, through the east of Pretoria going 45 degrees down, past the Development Bank to the west of Johannesburg, past Randburg, Ruimsig, Sunninghill, and ending in Naledi.  So, it will give a 45-degree line, which is actually contrary to what we are doing.  We always had a north-south, east – west, so this is a line running 45 degrees and that will link the east of Pretoria with the west of Johannesburg. That is 100 kilometres and they have to do linkages from the existing Sandton underground through to Randburg, going from Park Station down to the south and then going from the airport down the south including Boksburg.  This is just a consequential thing you know, just the next stages.

ALEC HOGG: Geoff, you have done your research into it.  How can we benefit as investors?

Geoff BlountGEOFF BLOUNT: Jack will probably give greater clarity on this one over the next few years.  I think that it is too early to say. We have a long process to follow and, God-willing, can start construction in 2016.  That will be quite nice for 2017, but there are certain rules that you have all around the world, where development occurs around stations.  So, there are a few things.  The one is obviously, the greater diversification of Sandton, which you accept is the new CBD of Johannesburg as  more workers can come in, not by traffic but by train, so more high rise development there.  Then from a secondary perspective, also around where the stations are and  further out.  Those areas will become more desirable from a commercial and a residential perspective.  So, shopping centres and ancillary support, as people then choose to live near the stations.  Anyone who lives near Fourways and wants to come into Sandton now, has a very unattractive proposition. But if you have a station in the area (Fourways), suddenly that pushes up residential prices in that area.  We have recently seen in London how in certain areas, Hackney for example, where they have  the London overground, which is a conversion of the old train system. Hackney prices have gone up 25 % over the last few years.  Interestingly enough, if you look at global examples, it tends to lead to more centralization of central business districts.  So, it doesn’t mean more offices are going to be built in the periphery, but more in the centre. You will get the densification there and then you will also get property prices rising around those nodes.  Maybe the third aspect from a property perspective – if you are a punter, is the re-generation of areas.  We have already seen Braamfontein coming back as a residential neighbourhood.  Gautrain has played part of that regeneration.  So, you will start seeing those types of long term players coming through.  You don’t have to quickly rush out and buy property.  But if you look at where the route network goes, you can start getting a feel for perhaps where one should start to live in the future, if you are planning five or ten years hence, where you might want to do a development. As you know, property developers have a very long lead time. So those are the places that you will start looking at.

GUGULETHU MFUPHI: Geoff, with any investment, naturally there are risks associated with it.  Any risks that you have identified with regards to investing in the Gautrain and the periphery?

GEOFF BLOUNT: Well, the risk is that you decide that you think they are going to build the station in Irene and for some reason Jack changes his mind and they don’t put it in Irene.  But, I think that those issues are well thought through.  I mean I don’t think the stations and the regions are picked at random.

ALEC HOGG: Do we know where the stations are?

GEOFF BLOUNT:  No, just the geography of the stations.  Not the physical whereabouts. At the moment, you have access from Menlyn – which is the new Pretoria CBD as you know – right down to Sandton.  So, just the general periphery in those areas is where you can start working out your transport nodes.  The other aspect. less about investments, is if people are the main factor of production, and you can get people around your city quicker and more efficiently. I don’t think it is going to reduce the number of cars on the road, but it might slow the growth of cars on the roads, and make our city more efficient, and that’s good for Gauteng.  That’s good for the whole region, because it makes our economy more efficient and more competitive.  So, there are all sorts of positive ancillary spin offs.  My wish is that we had this yesterday, so good luck to Gautrain. I wish that this can start soon.

GUGULETHU MFUPHI: Jack this brings me back to you.  How many jobs are you hoping to create?  Naturally you will need train drivers, security forces.

JACK VAN DER MERWE: Yeah, I think we were very successful with the first phase.  We created 126 000 jobs, direct and indirect jobs so it is really quite impressive.

ALEC HOGG: Sustainable? How many of those were sustainable? 

JACK VAN DER MERWE: Well, that is the argument most people have.  Most probably permanent employment now is about 2 500. Targets for employment were set during construction. If the goals weren’t met or they didn’t achieve those goals, there was a R70m fine every three months. So they actually went out and double performed, so that was really a big success story.  Just around the environment, currently we carrying 52 000 passengers per day and in Gauteng, the average motorist occupancy is 1.1 people in a car.  So we have taken 47 000 cars per day off the road.

ALEC HOGG: e-Tolls?

JACK VAN DER MERWE: e-Tolls we will see, depending on how violent the reaction is against it, but we expect that there would be again a surge in people coming to use the Gautrain.

GUGULETHU MFUPHI: One thing that people mention quite often is that during your peak times the trains are usually chock a block and you have also provided incentives for people to use the trains off peak.  But with the additional increase in passengers  during your peak periods, how do you hope to handle that, especially regarding operational times.

JACK VAN DER MERWE: We will start running shorter headways and there are plans afoot to buy additional rolling stock.

ALEC HOGG: When is that coming in?

JACK VAN DER MERWE: We are still busy with quite sensitive financial negotiations.  If that comes in we will start delivering withinin the next two years.

ALEC HOGG:  So we are going to be squashed in like London and Hackney for the next two years. And thereafter ?

JACK VAN DER MERWE: There is a little bit of incentivisation on using the train’s a bit later or earlier – a 15 % discount.  We will review it again at the end of the year, maybe increase that discount.  We are trying to spread the peak, because there is a very specific peak. People who use the trains are creatures of habit.  They want to take the 12 minutes past seven train, not the earlier one.

ALEC HOGG: Geoff, from an investment perspective, would Murray & Roberts have an inside track here given that it was involved in the first phase?

GEOFF BLOUNT: Yeah, you have organisational history and organisational knowledge. You probably have an advantage perhaps, but these days, knowledge is transferable and staff are transferable. So yeah, there might be some but I wouldn’t count on it.

ALEC HOGG: So, you wouldn’t support Murray & Roberts shares on the announcement of the Gautrain that it is expanding?

GEOFF BLOUNT:  No, and you must remember you are talking three, four, five years hence.

ALEC HOGG:  And of course they have been fighting with government as well.  You would have thought maybe the opposite Jack?

JACK VAN DER MERWE:  No, contractually during the development period, Murray & Roberts were the preferred supplier.  Now that we are in the operational phase we will go out on tender, so they will be in line. The institutional knowledge could be to their advantage or could be to their disadvantage. We will go out to open tender.

GEOFF BLOUNT: Maybe they will have their pencils more sharpened in terms of quoting.

GEOFF BLOUNT: Jack, is copper theft still a concern for you?  I know Alec has been affected by it.

ALEC HOGG: Yes, on my farm in MooiRiver.

JACK VAN DER MERWE: China is churning out a powerstation every six weeks and those power stations are copper hungry.  So, there is an insatiable market for copper in the world.  So, there will always be that. Copper theft is a combination of two things.  You have to have technology and you have to have warm bodies and I think we have got the mix right.  We have doubled up on our technology, as well as patrols at night.  So it seems we have contained it. Maybe there are easier targets, because a lot of Spoornet, a lot of Prasa lines have no fences. I think we are more a difficult target, but I don’t know.

ALEC HOGG: It is a bit like having a house in a street that has got more burglar bars around it. The thieves are probably still going to come, but probably not for you.

JACK VAN DER MERWE: Probably not for me yeah. Copper theft, you have to look at who the supplier is, who the wholesaler is to really catch it. There are two types of copper theft in our country. There is the bread and butter copper theft and then there are the syndicates. The bread and butter guy jumps over the fence, steals 300 m which is what you can carry. But, the syndicates come in there with huge trucks and they pull out three four kilometres of cabling and that is very serious.                                                             

ALEC HOGG: Have you  managed to get that under control?

JACK VAN DER MERWE: Yes, we have had bread and butter thefts up to now.  We have a very good relationship with the police, and together we have contained that.

ALEC HOGG:  More strength to your arm.  It is Rhino’s on the one side, cable theft on the other side.  Unless one can put these syndicates to bed our whole country will be better served? Thank you Jack van der Merwe, good to have you in the studio, thanks for the update.  I remain positive about Gautrain, Gugu, I know you do too. 

GUGULETHU MFUPHI: Well naturally, maybe the costs will come down her Jack?

ALEC HOGG: And Geoff we know what to do now, thank you.  We have got some good insights in how to benefit from this major long term trend I suppose. Buy yourself property in the new stations, but if you were to take a quick guess for us, maybe a few suburbs that you should be investing in very quickly?

GEOFF BLOUNT: I would go for areas that can go for rejuvenation, with some infrastructure in place. Braamfontein is one for example, even some of the older downtown areas, Boksburg downtown. We are putting so many stations in, people might want to live in apartment blocks, converting old offices,  old apartment blocks. I think the areas that are sort of more unloved at the moment, stand to benefit.

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