Property Developments

R million F2011   F2010     Revenue 32   35     Total operating loss (13)   (11)     Core operating loss (11)   (8)     Core operating margin (%) –   –     Fair value profit 16   –     Developments in progress 67   73     Employees (pax) 7   8

This segment contributed 0.3% (2010: 0.3%) to group revenue. As it suffered a loss, it did not contribute to group total operating profit in either the current or prior year.

Property Developments develops, owns and services A-grade property assets in South Africa. It focuses on the commercial, industrial and retail markets and selected developments in the residential market.

• Market review

  Property Developments operates in the South African market. The property sector in South Africa continued to encounter adverse market and operating conditions. Stringent regulations imposed on financial institutions to reserve capital have impeded their ability to fund developments. This often prevents developers from receiving the necessary funding for developments.

  In addition, vacancy rates remain high, resulting in lower rental yields. Interest rates are set to increase towards the end of the 2011 calendar year, with the outlook for the sector to remain depressed for the immediate term. The only sectors showing some growth are the affordable housing sector and the retail sector where vacancies are on the decline.

• Delivery

  Find below how we delivered on our objectives outlined in our F2010 integrated report.

  Key focus areas		Desired results		Status
  Exit remaining residential portfolio assets in a commercially attractive and sound manner.		To be completed by December 2010.		Positive progress achieved to date, although we have not fully divested of the portfolio as we are committed to realising optimal value. This remains a priority.
  Assist with securing tenants across all real estate sectors on Waterfall Farm.		Construction to commence on the Waterfall Farm by January 2011 with the intention of leveraging the construction and materials supply arm of the group.		Construction has commenced. During the period under review, a decision was taken at shareholder level to exit our equity participation for value in line with group returns. We continue leveraging construction and material opportunities.
  Secure and conclude three new signifi cant deals during F2011.		Convert acquisitions into development with fee generation and profi tability.		Successfully achieved, with Crystal Park, South African Property Opportunities (SAPRO) and Oxford Road concluded. Both SAPRO and Crystal Park are fee-earning transactions.
  Commence with construction on the newly-signed Crystal Park affordable housing contract.		To commence construction by the second quarter of calendar 2011.		Infrastructure works are now offi cially underway, with top structure construction due to commence in August 2011.
  Commence construction on one of our located land sites in the Sandton central business district.		To commence construction in the fi rst quarter of calendar 2011.		Due to adverse market conditions, this development will most likely be delayed until F2013.

  
  

• Financial overview

  		Year ended 30 June 2011		Year ended 30 June 2010
  	Revenue (R’000)	31 789		34 644
  	Total operating margin (%)	(40.3)		(30.9)
  	Core operating margin (%)	(33.2)		(23.2)

  Property Developments’ performance remained in line with expectations as the segment continued to progress its strategy of disinvestment from the residential sector in favour of securing A-grade commercial and retail property development positions in South Africa.

  Therefore, as anticipated, Property Developments’ revenue decreased by 8% from R34,6 million in F2010 to R31,8 million. The business incurred a core operating loss for the year of R10,6 million (2010: R8,0 million). The segment also recorded fair value upward adjustments of R15,7 million (2010: Rnil). The largest portion of this fair value related to the group’s investment in property developments. On 1 November 2008 the group acquired a 15% interest in the Waterfall Development Company (WDC). During the current year, the group disposed of its interest, which resulted in a fair value upward adjustment of R13,3 million and net proceeds of R133,3 million.

• Material issues within the business and how these have been managed

  Material issues within the business and how these have been managed

  Securing income-earning contracts

  In October 2010 the group secured the role of investment manager of an offshore listed property fund. The fund, South African Property Opportunities (SAPRO), is invested in a mixed portfolio of assets in South Africa. The total market value of these assets was externally valued at approximately R1,4 billion at December 2010.
  
  Our role as investment manager is to ensure a return to shareholders through managed development and sale of the asset portfolio. Selected assets will be fully developed, whilst others will be made available for sale once the salient rights and zonings are achieved in line with market cycles.

  Group Five is remunerated on a monthly basis and has specific incentives linked to returns for SAPRO shareholders.

  In addition, the team worked closely with the Group Five Motlekar social and affordable housing joint venture to facilitate the structuring of the Crystal Park affordable housing contract in Gauteng. Construction of a 50 unit show house complex on the site is now underway. Developments to date have been positive, with marketing initiatives due to start shortly. Property Developments will earn a development fee, whilst the construction revenue will be reported through Building and Housing.

  Positioning for core future development contracts
  
  During the year, a prime located land parcel in the Melrose area in Johannesburg was secured. With zoning rights anticipated to be obtained before the end of F2012, and with the ability to develop up to 65 000 square metres of bulk on the site in a phased approach, this project contributes significantly to our portfolio of land holding for long
  term development and ownership.
  
  During the year, it was decided to divest of our equity in 114 West in Sandton. Although we invested in line with our strategy of long term investment, market conditions led to the partners changing the terms of the investment to an individual office sale scheme, which does not offer long term returns. Our decision to divest provided upfront returns and additional headroom to secure further opportunities in the short term.

  Realising value from our Waterfall Farm investment
  
  While construction has officially commenced at the Waterfall Farm in Gauteng, the overall development continues to mature at a slower than anticipated basis.
  
  A decision was taken by all the shareholders of the Waterfall Development company to formally exit its equity participation in the Atterbury fund, the developers of the Waterfall Farm. This generated a fair value profit of R13,3 million.
  
  Our preferred construction position for all infrastructure and top structure works as well as specific material supply on the contract remains intact.

  Project conversion to development and/or sale
  
  The conversion of land assets into above-ground developments continues to be a challenge. We remain focused on achieving this as and when key tenants can be identified and engaged on a long term basis. Our assets are situated in prime locations and remain ungeared.
  
  The divestment of our existing residential portfolio has also taken longer than anticipated. This was largely due to the group’s strategy of maximising value during the current negative cycle. To achieve returns during this cycle while sales at appropriate returns have not been possible, the group has rented its units on hand. Tenancy levels remain high, with revenues matching expenses.

  Property market cycle
  
  Careful and considered management of the downside risks in the real estate sector has played a vital part in achieving the reported results.

  With interest rates set to rise towards the end of calendar year 2011 and with an expected slow and protracted recovery, management will continue to focus on managing its portfolio transition strategy throughthe downturn to preserve current asset values. With a diversified portfolio of fee-generating work, combined with a longer term equity positioning, the segment is positioned for profit growth in the longer term.

  Key achievements
  	We secured the role of investment manager of an offshore listed property fund, South African Property Opportunities (SAPRO)
  	A prime located land parcel in the Melrose area in Johannesburg was secured
  	Construction on Crystal Park affordable housing project was started earlier than anticipated with the construction of a 50 unit show house complex

  

• Looking forward

  Key focus areas for F2012	Desired results
  Exit remaining residential portfolio assets in a commercially attractive and sound manner.	Dispose of assets at the highest value possible while taking cognisance of current tenant levels and market recovery
  Secure and conclude three new signifi cant deals for the segment during F2012.	Convert land acquisitions into development fee generation and profi tability to match vacancy decline in line with a gradual market recovery
  Manage assets effectively and return target value for SAPRO shareholders through progression of zoning rights and through sale of certain identified assets.	Achieve target hurdles by December 2011 and progress planning and zoning processes to satisfaction of client
  Rightsize team through expansion to realise and effectively manage secured and pipeline opportunities.	Grow team through additional resourcing in parallel with secured pportunities to maximise value for the group