Sandton’s centrally located Mushroom Park, located inside the richest square mile in Africa, is to house a new 240-apartment block. The flagship and 11th project of the Capital Hotel Group, with 40 kept for a hotel and the others already sold, only 80 of the apartments will be available to investors at the official launch on August 12th. In this special podcast, Capital’s MD Marc Wachsberger explains to Biznews.com’s Alec Hogg why investors have been so excited about the innovative purchase-to-lease-back project.
This special podcast is brought to you by the Capital Hotel Group, whose Managing Director Marc Wachsberger is with us in the studio. Marc, you’re a rapidly expanding business. You currently have six apartment blocks, five more that you’re busy building, and maybe the flagship of them all is the one that we’re talking about today – The Capital on the Park.
Absolutely. Capital on the Park is going to be our flagship. It’s going to trump them all. It’s a mix of residential and hotel, which has not been seen in South Africa. It’s been seen internationally and is something very special for the best location in Sandton.
Mushroom Park has rights to build some wonderful tower buildings, quite similar to Central Park and we’re lucky enough to have a location on Katherine, and bordering onto the Park.
Pretty close to Gautrain and other very valuable amenities.
Absolutely, and to all the upcoming (over seven major) commercial developments with a whole lot of employees coming into town.
Where did it all start? As I mentioned in the introduction, you have six projects already: five that are in gestation. Where do you come from?
Hydro Park was our first development, in 2008. The concept was leasing sectional title apartments, furnishing them, and then subletting them to compete with the hotel sector. In that regard, we had landlords who would lease to us on a three-year fixed lease, very hassle-free, and with money in the bank on the first of the month. We would take all the upside and downside risk of filling the properties and that concept grew into where we started buying our own buildings and then ultimately, developing our own buildings.
It sounds a bit like the leasebacks that financial institutions do.
It’s not totally dissimilar. Sometimes you need capital. We need capital as well and so for us to sell properties and lease them back, allows us to grow. It becomes a catalyst for our growth.
Over the years, presumably, you have quite a few very satisfied clients.
We have satisfied clients – people who book with us. We have very satisfied investors as well – people who have bought properties from us, are our landlords, and lease it to us. They have absolutely no hassle. We do all the maintenance. We can’t rely on them to come and fix a geyser for one of our sub-tenants, which are normally corporates who are staying with us and require immediate services. These investors lease the property to us. The money’s in the bank on the first of the month – absolutely hassle-free, and I’ve had incredible returns.
Investors. Does that mean that you have to put a lot of money up, or can you buy just one, single apartment?
You can buy an apartment. You can get a bond as a home-loan, i.e. 20 years from the banks. Normally, the banks want to see you putting ten or 20 percent (more so today) down, so you might put R400k down today to buy an apartment of R2m. The returns really, are in the form of the rent you get from us and then the capital appreciation is obviously, very special.
What’s the guarantee that the rental income will flow in?
The guarantee is essentially, our credit risk. We’re backed by strong private equity as well as being a big enough business to own our own buildings. We have a seven-year track record of making sure we pay our landlords on time.
Let me just get this right, Marc. I invest in Capital on the Park. I give you R400k. I have my R2m apartment and I’m paying my bond every month, to the bank. I then lease that apartment back to you and you pay me rental.
Absolutely. The rent will cover the bond if you’ve put down that 20 percent. You’ll put in some more money for furniture as well. Rent covers the bond. Every year, you get a six percent escalation on the rent as well and of course, as I said; the golden thread is the capital appreciation. Historically, a building like 20 West: we’ve sold apartments for R2m. They’ve then gone and resold just three years later, for R3m and that’s because the buildings are run well. We have a high vested interest in the building. We own many of the apartments (ourselves), we run a good show and of course, the property market has also boomed. Historically, we think it will continue to boom, going forward. There’s a shortage of residential property and if we can repeat those same capital gains, that’s a better investment product in our view than some of the other items out there.
How big is Capital on the Park?
Capital on the Park has 240 apartments over 24,000m2. The secret sauce for us is the combination of hotel (where we have a 120-room hotel that we’re keeping) mixed with 200 residential apartments. Many people will buy to live, but more so, these investors will buy and lease the apartment to us or directly into the market. That mixed with conference centres, parking garages, pools, and restaurants etcetera, creates a really large development, but very small units in the development. That’s some secret as well.
Very small units: just unpack that.
What’s happened in the market is that developers have a bulk that normally exceeds their allowance of the number of units they can build, so they build big apartments and you get 100m2 one-bedroomed apartment and 60m2 one-bedroomed studios that are very big and really, attract a ‘buy to live’ person. From an investment perspective: the smaller the apartment, the better because you don’t get a disproportionate rental income if you have a smaller unit. We found that we (and everyone in the market) tries to get the units small, but somehow the economics don’t work. With us combining a hotel and a residential, we’ve managed to get small apartments and therefore, they come in at a great price point and of course, they rent very well.
Would there be interest from offshore? I’m just thinking here that many people who perhaps live overseas, have interests in South Africa. You can get on the aeroplane, get off at O.R. Tambo, onto the Gautrain, literally walk from the Gautrain down to Capital on the Park and maybe, spend your time at the apartment you own for the time you need to come here. Is there a market opportunity, there?
Absolutely. We have three ways in which people invest. Firstly, they invest by it being their home. They buy it, they live there, they live in a hotel, and they have all those services. Secondly, you can be an investor – buy it and lease to us. The one you’re referring to is if you buy and you lease it to us, you can utilise it when you’re in town. In particular, we have many African offshore travellers. They’re in town, doing business; they’re here for two or three days per week, sometimes only one week per month. They want a whole apartment because they’re here for a week and they hand over the keys to us to essentially, ensure they get this guaranteed rental income when they’re not there. When they’re here, they live in a well-managed hotel.
Where do you get your tenants from?
Our tenants are commercial clients such as banks and IT firms. We’ve had a brain drain in South Africa and we have to import skills into the country (with Eskom and the loadshedding crisis as an example). They need to import many consultants to come and work inside Eskom to get it right. Those consultants are working on a three-week project and they need a place to stay. They don’t want to stay in a cramped hotel room for three weeks. We’re an apartment, so that’s our audience.
So it is tailored to South Africa, but where did the model come from? Did you pick it up from somewhere else in the world?
The model actually came from my financial background, which was simply looking and seeing that hotels in South Africa were incredibly expensive. You would pay R1500.00 per night for a cramped hotel room and yet, I could lease a large apartment for R12k per month. Those numbers didn’t make sense to me in 2008, so we did what any financial person would do, which is arbitrage it. Lease low. Sublet shorter term – seven days occupancy to pay back our rent.
It sounds as though this could travel to other parts of the world.
I’ve been fortunate enough to travel extensively, see many other hotels and residential apartments overseas, see what works, what the market likes, and replicate the same wherever possible.
The numbers…the economics of it for the investor…
For the investor, they get a nine-point-three percent gross return, seven-point-two percent nett (that’s after deduction of levies, and rates and taxes) which, like any standard lease, the landlord pays – just levies and rates. We pay for all the others such as breakages, insurances and DSTV, etcetera. They’re getting up to seven-point-two percent return, depending on which unit you buy in the building and then the golden thread is that capital appreciation where we see an apartment selling for R2m. An investor would buy for R2m and just three years later, selling the same apartment for R3m.
The idea here is if you have the credit cord and you have the access to finance, you use that to arbitrage in your own respect (your own credit rating) and make the investment, get yourself a seven percent return, perhaps pay a small difference between what you have on your bond, but you enjoy the capital appreciation.
Sure. Your alternatives are things like putting your money in the bank where you get five percent. Here you get seven percent plus all the upside.
You’re launching on 12th of August. Have you pre-sold any of the units?
We have. We’ve had investors who’ve bought from us previously such as Hydro Park, and 20 West. They’ve done incredibly well with us so they were the first to jump and buy. We did a pre-launch to that closed group and we sold 80 almost immediately. We then have another investor looking to take a chunk (as in 40). As I said, we’re keeping a big chunk ourselves, so we have only 80 left for sale at that launch on 12th of August.
Marc Wachsberger is the Managing Director of the Capital Hotel Group and this special podcast was brought to you by the Capital Hotel Group.