The world is changing fast and to keep up you need local knowledge with global context.
EDINBURGH — When young entrepreneur Jonathan Liebmann took up the challenge of fixing up inner-city Johannesburg to make it not only liveable but trendy, he had a serious challenge on his hands. The South African city has the unenviable reputation as one of the world’s most dangerous in which to live and play. But, with a vibrant lifestyle and melting-pot cultural texture, Liebmann looked past the problems to see opportunity and social cohesion. Maboneng was the fruit of Liebmann’s labour. It attracted investors, trendy galleries and artisanal shops and, in a nutshell, became a shining example of how property development can combat urban decay. But, the company Liebmann founded collapsed earlier this year, with units being auctioned off at way below estimated market value to bargain-hunters. Chartered Accountant Sinesipho Maninjwa picks up the story to explain what went wrong behind-the-scenes at Propertuity, the company that pioneered urban renewal in South Africa. – Jackie Cameron
Maboneng – The story of Propertuity
On 15 April 2019, the company that led Property Developer of popular hangout spots in the Maboneng Precinct in inner-city Johannesburg auctioned off 18 buildings as part of the liquidation process. According to Moneyweb (15 April 2019), a total of R109.5m was raised, with offers for the various buildings ranging from R400,000 to R32m. This has brought a rather sad end to Propertuity – a company heralded as pioneers of urban renewal projects.
Key properties in the Johannesburg CBD’s flagship gentrification project, Maboneng, have been auctioned at a fraction of their supposed value. A liquidation auction this week fetched bids totalling R109.5m – less than the supposed value of R133m https://t.co/WQR6FJm46V pic.twitter.com/YcaJhkeMqo
— City Press (@City_Press) April 21, 2019
Who is Propertuity and what was their business model?
The company was started in 2007 by Jonathan Liebmann with an initial investment of a couple million to buy a building in Jeppestown with the vision to create a life in the city where people could work, play and live in a creative urban space. The business vehicle launched with property investments that collectively became known as the Maboneng Precinct. The company was a beacon of hope for greater investment towards inner-city regeneration.
As with a conventional property developer, Propertuity bought inner-city buildings, often in disrepair, at a relatively low value to fix them up and sell at a profit or hold to earn rental income. The portfolio included a mix of residential, retail and office space housing advertising agencies, art galleries, private studios, residents etc – an attraction to the young and upwardly mobile.
The model can be likened to redevelopment projects in cities like New York and London amongst others. It’s speculated that at its peak, the company sold millions worth of property. And was to meet their 2020 vision of growing the precinct to an 11km square radius with over 20,000 occupants.
Key elements to Propertuity’s initial success include the following:
- Access to Financial Capital – Liebmann was able to secure an institutional investor with significant balance sheet capability early in the founding of the business who happened to be reclusive billionaire Jonathon Beare of Buffet Investments. This enabled the company to quickly buy up buildings and grow their portfolio.
- Social Capital – A key part of Maboneng’s creative and artsy allure was built on the support of the art community, who took up residence in art studios and galleries. Their early adoption of the neighbourhood fostered a network effect. The precinct enjoyed good publicity too i.e. Forbes Magazine, listed Maboneng as one of the coolest areas to live in. In addition, Jonathan, the charismatic face of the business, spent a significant amount of time doing public relations
- Taxation Regiment – In order to stimulate investments, the local government enacted various incentives to attract property developers. The government introduced Urban Development Zone (UDZ) tax incentive in 2003 which included allows buyers to reclaim 30% of the purchase price as a tax deduction against taxable profit over five years.
- Further Development – Propertuity’s establishing Maboneng and it having grown quite significantly attracted additional investments from the likes of Arrowhead Properties (listed REIT vehicle), Delta Property Fund, Quorum etc. Resultantly, Propertuity moved from owning the majority of buildings to a minority of them in the area. Further investment fostered the establishment of a local community organisation, which collects levies from owners to spend on the general upkeep of the area as well as the deployment of private security.
What went wrong?
Towards the end of 2016, in what can be described as one of the most important testimonies of a job well done to Jonathan and team, RMB Investment Holdings (“RMH”) announced that they would be purchasing a 34.1% stake in the business for an undisclosed amount. The investment holdings firm introduced additional funding and some much-needed corporate governance in the form of systems and accountability structures in the business. On paper this investment made sense, as RMH had announced the property as an investment class in consideration and were looking forward to partner with an entrepreneur such as Jonathan.
A number of properties at Maboneng Precinct in Jo'burg will be auctioned in the coming week. Auction will devalue the properties. I wish the owners had sold them before being liquidated.
— Moses Moreroa (@MoreroaMoses) April 7, 2019
However, soon enough it become apparent things at Propertuity were not as they seemed. Some of the challenges stated in RMH‘s Annual Financial Statements were:
- Material underperformance in terms of property sales;
- Overly optimistic asset selection;
- Limited management capacity; and
- Excessive gearing and operational challenges
Most concerning is RMH stating they underestimated the operational complexity of expanding the business which is uncanny given they manage a multi-billion investment portfolio. One would have thought quite a few of the issues raised were discoverable at the due diligence stage of the acquisition process.
What were some of the interventions to salvage the business?
In order to stop the bleeding in the business a few strategic measures were taken such as:
- Rights issue: The business undertook a rights issue to raise additional shareholder capital. This resulted in RMH increasing their shareholding from the initial 34% to 49%. Bringing in a total investment value circa R300m.
- Change in management: Although reported as amicable the board initiated a change in management and brought a more “experienced“ team of seasoned proper managers and developers. Propertuity parted ways with its founder, Jonathan Liebmann in May 2018, along with another 50 individuals apparently.
- Portfolio rationalisation: Propertuity’s initial strategy was to acquire as many buildings as possible with little consideration for a change in economic climate. The slowdown that hit the South African economy affected consumers incomes which dampened demand for units in the precinct.
It should be noted that all these endeavours were in vain, as months later in October 2018 the shareholders commenced the liquidation process.
What does the ending look like?
The circa R300m impairment incurred in the collapse of Propertuity is estimated not to have a material impact on earnings for RMH given their multi-billion investment portfolio. Although things may not have ended well with Propertuity, RMH still sees value in the inner-city property company Divercity. Since leaving the management of the company, Jonathan has gotten involved in a new property tech app called Flow. In early 2019, they managed to raise R20m which became SA’s biggest seed investment for the new industry to date.
So everyone has been able to move on.
- Sinesipho Maninjwa is a CA (SA) and Financial News Commentator. She is popularly known as the Resident Deal Maker on the Deal Makers which discusses Corporate Finance related transactions on Power Business on 98.7 FM, in addition to being the segment contributor, she produces and curates the content.