With only a few exceptions, in the last 30 years, most major companies have moved away from the Johannesburg CBD to Sandton, Rosebank or further north. The exodus created opportunities for investors keen to take advantage of property assets being sold at well below replacement cost. The kind of opportunity a socially-driven Impact Investment house loves. In this special podcast, Futuregrowth’s Paul Semple explains why his company has made a R2bn bet in a district others have shunned. With 15% yields on offer at far lower than generally perceived risk, who wouldn’t be? – AH
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ALEC HOGG: This undictated special podcast is brought to you by Futuregrowth and joining us on the line is Paul Semple, who’s with Futuregrowth. Paul, two weeks ago I spoke to Jonathan Liebmann, a young entrepreneur who’s the man behind Maboneng – the rejuvenation project in Central Johannesburg. He mentioned that his biggest funder is Futuregrowth, so it would be nice to actually pick up from you guys – maybe more broadly, to begin with. Inner city rejuvenation…why is it an area that attracts you?
PAUL SEMPLE: Thanks, Alec. Yes, Maboneng has been our most recent investment in the inner city area in Johannesburg, but Futuregrowth has been investing in this market for the last seven or eight years. Over this time we’ve seen a huge growth and more and more opportunities to invest, and we believe that it will continue.
ALEC HOGG: I guess the fact that there is an opportunity should come as no surprise to anyone who just has a look at downtown Johannesburg. It’s a shadow of what it was, maybe 30 years ago.
PAUL SEMPLE: Yes. Johannesburg has been through a cycle and it definitely degenerated through the 90’s and early 2000’s, but over the last five to ten years there’s been an increasing private sector interest in investing in Johannesburg. This, together with support by the municipality and local Government, has encouraged more investment in this area and it’s definitely had a positive effect on cleaning up the inner city and basically, getting it back on its feet.
ALEC HOGG: Given where it’s coming from, do you require a higher than average return on investment before putting money into downtown Johannesburg?
PAUL SEMPLE: Yes. I think that it’s a misconception amongst property investors that there’s a higher risk of investing in property in the downtown area. Ironically, that is probably one of the most…or certainly, the affordable market per se, is one of the most active housing markets in South Africa. There are risks – absolutely -, we do price for that risk, but it’s certainly no higher risk than perhaps, the high-income housing sector.
ALEC HOGG: Starting off with Maboneng as a specific project, how did you get involved there?
PAUL SEMPLE: We got involved primarily through our partner, Trust for Urban Housing Finance, which is another investment that we’ve made…another company that basically lends money to entrepreneurs who want to buy properties in Johannesburg. Futuregrowth and TUHF provided a joint finance arrangement to Maboneng. Maboneng had a relationship with TUHF prior to us being involved.
ALEC HOGG: How much is involved there?
PAUL SEMPLE: Initially, our line to them is around R200m and this is supported by a pipeline of projects that Maboneng is in the process of acquiring in the Eastern Precinct of Johannesburg – the inner city of Johannesburg. That line will be drawn down over the next 12 months or so to acquire these properties and refurbish them.
ALEC HOGG: And the prices that they’re paying for those properties, relative to say…Sandton…
PAUL SEMPLE: Yes. Properties are acquired at well below replacement cost and they’re carefully selected, with a focus on value properties with strong yields and excellent prospects for rental growth. We’re looking at under R2000.00/m2.
ALEC HOGG: And Jonathan Liebmann clearly, has impressed you in what he’s done so far. He was telling us that when he was 24 years old – he’s not much older now – he made his first investment in Arts on Main and it’s just grown from there.
PAUL SEMPLE: Yes, we’re really excited by what’s happening in the Maboneng Precinct. There’s a lot of new buying and selling activity in that area, which has been spurred on by the investment that Jonathan and his team are making.
ALEC HOGG: Is it something like, for example, you create a little oasis in a pretty rundown area and then, just expand it slowly over time, so that eventually the whole place is an oasis? Is that the long-term goal?
PAUL SEMPLE: That’s one angle – one approach, which Investec can use but we have other investors such as ECO for example that has bought various properties throughout the inner city of Johannesburg and are now moving outside the inner city, into the suburban areas. It really depends on the focus of the business, and what their capacity is to manage buildings outside of a central area.
ALEC HOGG: Maboneng…primarily commercial – in other words, business…
PAUL SEMPLE: Business and residential. There’s a good mix of both. You’re seeing more and more people moving in to rent and buy in that area, as well as many businesses and entrepreneurial activities starting up along the street frontages in that at area.
ALEC HOGG: I suppose the major thing there is that you have to have the City itself supporting you with services.
PAUL SEMPLE: Absolutely critical, Alec. The municipal infrastructure is really important and there needs to be good transport systems as well, and good policing. This will all help to eradicate that crime and grime we spoke about earlier, that Johannesburg went through in the 90’s and it will definitely attract private sector investment if there is that support by local Government.
ALEC HOGG: Maboneng is, in many ways, the flag-waver for inner city investment in Johannesburg but it’s not the only one you’re involved with.
PAUL SEMPLE: No. We’re involved with various entities. We’ve invested debt and equity into JIKA. We’ve also supported Trust Urban Housing Finance. They provide loans to property investors. Maboneng, Cosmopolitan Housing (who are building contractors and developers, and we’ve invested in Afriquest as well, which is a commercial property investor much along the same lines as what we’ve been talking about in the residential sector. However, they buy commercial properties cheaply, upgrade them, and re-tenant them etcetera.
ALEC HOGG: And in total…the investment in downtown Johannesburg through these various channels?
PAUL SEMPLE: Our total is currently R2bn, over those five investments.
ALEC HOGG: From an outsider’s point of view, you have to ask ‘what is it that you’re seeing that others aren’t’.
PAUL SEMPLE: Firstly, we’re seeing great investment opportunities in terms of yields that are being earned on these investments. Perhaps more than that, there’s great social impact taking place so it’s on-the-ground impact. It’s affecting people’s lives. It’s providing safe, clean, affordable accommodation to people that want to live closer to work. It’s cutting down on people’s transport bills and basically, it’s providing a foundation for employment opportunities and entrepreneurial activity in the inner cities.
ALEC HOGG: You’ve obviously visited. Would you live there?
PAUL SEMPLE: I would buy a property in Maboneng. I don’t live in Johannesburg, but I certainly see it as being a great investment opportunity.
ALEC HOGG: When you say ‘a great investment’, how does it compare (purchasing a property to live in) to what you would have to pay elsewhere, in an upmarket suburb?
PAUL SEMPLE: Maboneng has changed over the last year or two. As it’s become more and more in demand, prices have moved up but I believe that rental yields are still great. You’re still looking at rental yields of 15 percent plus generally, in the inner city as well as Maboneng itself. I think it’s a great investment opportunity to make.
ALEC HOGG: And the investment property is still available, clearly, because of the infrastructural support that you guys have been giving and, I presume, others.
PAUL SEMPLE: Yes, absolutely. We just trust that local Government will continue to support initiatives like this.
ALEC HOGG: Paul Semple is with Futuregrowth and this undictated special podcast was brought to you by Futuregrowth.
