The controversy surrounding the purchase of prime Cape Town Foreshore land escalated on Wednesday. Growthpoint, the purchaser of the Site B property, finally gave its side of the story. Unfortunately, its explanation is unconvincing. But it is the City of Cape Town that has the hardest questions to answer about why it sold a prime piece of land for less than half its value.
The background is this: The City of Cape Town put the Site B property up for auction in September 2016. Growthpoint won the auction with an R86.5 million bid. Its intention is to build a hotel and shops on the property. So far, so good.
But housing activist organisation Ndifuna Ukwazi discovered that the auction documents advertised the property as having 17,500m2 floor space (called "bulk" in property jargon). In fact the correct floor space for the property should have been advertised as 46,000m2. (The complicated details behind this are explained here.)
What this means is that Growthpoint paid less R1,888 per square metre. But going prices at the time in the city centre were a bit shy of R5,000 per square metre. The property was in effect worth more than R220 million. All this was pointed out by Ndifuna Ukwazi, who argue that the City has too cosy a relationship with property developers, and that the lost money could have been used by the City to fund inner-city housing for low-income families.
The situation escalated: Activists protested on the property and were removed, which resulted in a court case by Growthpoint against activist group Reclaim the City, won by the latter. Patricia de Lille, while still mayor, called for an investigation into the sale: one of her political rivals Ian Neilson was implicated in the bungle. At the time of the sale Neilson was the Mayco Member for Finance who oversaw the City's property sales.
To complicate matters, the Municipal Planning Tribunal found on 2 July 2019 that the Site B property zoning is undetermined and that Growthpoint has no vested rights for development.
In Wednesday's press conference, Growthpoint made two notable claims: (1) Before bidding at the auction, Growthpoint did not know that the property had 46,000m2 of bulk. (2) In any case, it is incorrect to value property according to its bulk. (Growthpoint's full press statement is below this article.)
The first statement actually reinforces Ndifuna Ukwazi's argument: the property was sold for far less than its correct value because all of the bidding would have been based on the much lower bulk value. But it is surprising that Growthpoint did not calculate exactly how much space would be needed for its planned development before purchasing the property.
The second statement is misleading.
Growthpoint states: "Valuing a property based on a bulk rate is not a viable method of valuation. A correct valuation is based on a residual value calculation and the full-and-best use of the property. Based on the proposed development, the potential income and anticipated costs, a valuation of R227 million is not remotely feasible or possible."
What this means is that a fair price is calculated (roughly) by subtracting the profit and cost of the development from its expected return. The balance left is the property price. This is of course a highly subjective calculation that depends on the kind of business and numerous hard-to-predict economic factors. Growthpoint has not provided details of its calculation.
But in any case the price per metre of bulk space is related to all this, and market forces indicate that the price per square metre in the city centre is far more than Growthpoint paid. This City of Cape Town document indicates that bulk space is relevant to the calculation of property value. That document lists 11 properties sold across the city (including Site B). The cheapest was sold at a price of R3,694/m2 bulk in June 2014, which is much more than Growthpoint paid more than two years later.
In any case, had the bulk space of the property been properly advertised at auction, it's reasonable to assume the winning bid would have been much higher.
So where to from here?
We agree with Growthpoint that it should be able to develop the full 46,000m2. Densification in a growing city like Cape Town makes sense. On the other hand it makes no sense to build a squat tiny building in between the high rises surrounding Site B. Presumably the Municipal Planning Tribunal will ultimately give permission to Growthpoint to build a high-rise.
But there needs to be an independent investigation into how this debacle occurred. The horse has bolted: it's extremely unlikely Growthpoint can be compelled to pay much more money for the property at this point (its press statement suggests Growthpoint may be convinced to pay R600 per square metre for the difference between 46,000 and 17,500m2 which comes to about R17 million, although GroundUp understands this may be a standard tax that all developers have to pay). But someone in the City needs to be held responsible for what is at best a slapdash approach to valuing property.
The City claims it has completed a forensic investigation and found nothing irregular; that's not good enough. The investigation must be independent. In normal times the Public Protector would run such an investigation, but there's a justified lack of confidence in that institution currently. And there's not much confidence either, also justifiably, in the big auditing firms. So there's a dilemma brought on by years of state capture. Perhaps a retired judge may need to oversee the inquiry.
Cape Town desperately needs more investment and jobs of the sort Growthpoint promises in its press statement. The city centre also desperately needs more housing for low-income families who work in or near the city. Whether or not part of the Site B development is appropriate for that is a matter for public debate. But Ndifuna Ukwazi is right that the money the City lost in the sale of Site B could have been used for this purpose.
Full press statement by Growthpoint
Growthpoint didn't know that the property had more rights prior to buying it on auction
1. Growthpoint heard about the sale of the property through a newspaper article in the Cape Times on 24 April 2015.
2. Growthpoint received a copy of a publicly available prospectus made available by Aucor in August 2016 giving notice that the property was to be placed on auction and giving details about the property. In it, they stated the property had 17,500m2 of bulk.
3. The auction occurred on 7 September 2016 at 11am at the CTICC. It was a well-attended public auction with several pre-qualified bidders who actively participated in the auction. Growthpoint paid R86.5 million (excluding VAT at 14%) for the land.
4. Growthpoint were active and interested bidders as we own a number of properties in the precinct, and we see this acquisition and development as adding to the value of the precinct. For this reason, we believe we were willing and able to pay more than others at the auction based on the strategic value of the property to ourselves.
5. Growthpoint took transfer of the land on 7 March 2017.
6. Our town planners Nigel Burls and Associates were appointed in approximately November 2016, which was after the auction and before the transfer of the property.
7. After the acquisition, Growthpoint appointed a professional team, including architects and planners, to conceive of a development scheme on the property.
8. The proposed scheme involves retail on the ground floor, offices and a three- and four-star combination hotel.
9. A further planning consultant Japie Hugo was appointed on 22 March 2017. (Japie previously worked for the City of Cape Town but had no involvement with the City's alienation of Site B).
10. At a meeting of the professionals on 4 April 2017, when establishing what rights were needed to accommodate the proposed scheme, it was established that the Site had a GB7 zoning and 46,000m2 of bulk. This was supported by a zoning certificate obtained from the City of Cape Town which confirmed the rights of approximately 46,000m2 bulk available on Site B.
11. Before acquiring the property at the auction, Growthpoint had no prior knowledge that the property had 46,000m2 of bulk.
12. Growthpoint continued with the planning application, which involved a few setbacks and other planning departures. A servitude right-of-way across the property was moved in terms of a High Court application process. Pre-consultation meetings were undertaken with the City planning department, as is the normal process.
13. The application was submitted to the City of Cape Town in June 2018 after extensive pre-submission consultations in June 2018 with additional information provided on request in July 2018, and accepted by them on 27 August 2018.
14. The application was advertised by the City on 7 September 2018 with the closing date for comments being on 8 October 2018. By then, the application had received only five objections. Some related to view, others to shade, an objection relating to social justice and affordable housing was received, and an objection from the City was received stating that the development site did not have the rights as envisaged.
15. Concurrently with the planning process, Growthpoint has approached the City of Cape Town to acquire a servitude under Lower Loop Street adjacent to, and on the western side of, Site B to create some underground basement parking and to facilitate streamlined access to the precinct of properties. This is not a pre-requisite for the development but makes for better urban planning, traffic flows, infrastructure management and less visible structured parking, improving the precinct.
Growthpoint didn't underpay for the property by R140 million
16. Following Growthpoint's application stating that it has 46,000m2 of bulk, Ndifuna Ukwazi has stated that the City "botched" the sale by stating in the prospectus that the land had 17,500m2 of bulk.
17. By simply extrapolating the sale price as a bulk rate (R86,500,000 divided by 17,500m2 = R4,942.85 per bulk meter), and then taking that bulk rate of R4,942.85 x 46,000m2 of bulk, equals a value of R227,371,428. This valuation is inaccurate, yet on the face of it indicates the property was undersold by some R140 million. The inaccurate valuation stated by Ndifuna Ukwazi has been widely and repeatedly published, despite our persistent assertions that the valuation calculation is wrong. An explanation as to why their figure is wrong follows, but we urge you to get your own independent verification of the facts from a professional, accredited property valuer.
18. Valuing a property based on a bulk rate is not a viable method of valuation. A correct valuation is based on a residual value calculation and the full-and-best use of the property. Based on the proposed development, the potential income and anticipated costs, a valuation of R227 million is not remotely feasible or possible.
19. Growthpoint obtained an independent valuation for the property as at 1 December 2018 and based on appropriate valuation principles (based on 46,000m2 of bulk) the valuation was R92 million. Making allowance for time (interest) it shows that Growthpoint paid a fair value for the property.
20. It is also incorrect to say that one buys bulk. If the property had 17,500m2 of bulk, we would have applied for more bulk and paid DC's (bulk infrastructure contributions), which is approximately R600 per bulk meter.
21. There is no factual basis to say that Growthpoint underpaid for the property.
Growthpoint wasn't party to the City of Cape Town's forensic investigation into Site B
22. The forensic investigation in question was an internal City process. We weren't consulted during the process and are not in a position to comment on the report. We would welcome the report being made public.
The Municipal Planning Tribunal (MPT) Meeting on 2 July 2019 found the Site B property zoning undetermined, with no vested rights for development
23. In the progression of Growthpoint's planning application, the matter was tabled before the MPT on 2 July 2019.
24. The MPT was principally asked by the City to determine if Growthpoint's application was a valid application, i.e. whether the property had the 46,000m2 of bulk as envisaged in the application.
25. This particular property was part of Cape Town Old Power Station site, and previous subdivisions of the property had been undertaken by the City as owner. The discussion related to whether a subdivision in 1997 had been acted upon within a stipulated five-year period.
26. The MPT was of the view that the subdivision had not been acted upon and therefore lapsed and the property's zoning is therefore not determined. In the MPT's view, the application accordingly failed. Growthpoint is considering the finding and has a number of options available to it; one of them is to appeal the decision, which we are likely to do.
27. Growthpoint paid a full and fair price for the property based on the fact that we own other property in the precinct - Site B accordingly holds strategic value for us. We disagree with the MPT findings that the property doesn't have 46,000m² of bulk.
Growthpoint's respects the decision of the court regarding the Site B protesters
28. Several organisations have gained much exposure in the press by drawing as much attention as possible to the view that the City has undersold Site B by R140 million.
29. One of the steps taken by groups of protesters was to take control of the property on 4 December 2018 and build structures on the property with mattresses, generators and toilets placed onto the property without our permission.
30. Growthpoint obtained an ex parte court order to remove the occupants from the site. On presentation of the order that evening, the property was vacated.
31. On the return day of the court proceedings, two interested parties (voluntary social movements), while formally undertaking not to return to the property, argued that we breached the duty of utmost good faith in not disclosing all material facts when the ex parte application was brought.
32. Notwithstanding a copy of an email attached to the founding affidavit between our attorney and the social movement's attorney, and photos of the structures and people on site that were taken during the course of the day in question, the court found that there could have and should have been more disclosure relating to the occupants of the property. The interim order was accordingly discharged, rather than being made the final order.
33. Growthpoint respects the decision of the court.
Regarding the call for a Public Protector investigation
34. We are open to any and every investigation of the sale. Our involvement in the transaction is a matter of public record - the property was sold on public auction - the facts are easily accessible and self-explanatory.
35. Unfortunately, concocted insinuations of misconduct for ulterior political motives detract from what otherwise should be a welcome investment into the City.
Growthpoint doesn't have a relationship with any political party
36. It is Growthpoint's policy not to fund, or support in any other way, political parties or associations with political affiliations.
37. With transformation being an imperative for Growthpoint, it has completed a number of significant BEE transactions, the second being in 2006 with black controlled and managed property investment holding company Phatsima Properties, led by Herman Mashaba. This transaction followed Growthpoint's takeover of Metboard, with Mashaba being the chosen empowerment partner for Metboard and a director at the time. As part of the transaction, 2.3% of Growthpoint's units then in issue were acquired by Phatsima Properties. Mashaba, who held a 40% indirect beneficial interest in Phatsima, became a non-executive director of Growthpoint and continued to represent Phatsima in this position. He went on to serve as Deputy Chairman of Growthpoint before resigning with immediate effect on 27 January 2016, to pursue his political ambitions.
What we hope to create on the property
38. Growthpoint is a significant investor in the Western Cape. We currently own R17.2 billion of property assets in the Western Cape and pay rates to the City of approximately R500 million each year.
39. The development on Site B is for a proposed mixed-use building, with retail on the ground floor, offices, collaborative workspace and a hotel. At a time when South Africa sorely needs investment, the development is likely to constitute an approximate investment of around R2.2 billion in the City.
40. Should the development progress there are additional benefits for the City;
a. 1,000 jobs during construction,
b. 300 long-term jobs within the hotel, and a total of up to 2,500 jobs on the property
c. Potentially the introduction of an established international hotel brand not yet in South Africa with the resultant increase in tourists,
d. Around R16 million will be added to the City's tax base per year.
41. Growthpoint takes social responsibility very seriously. We believe that for Growthpoint to thrive the city must thrive. Among other social initiatives by our CSI team, Growthpoint plays a key role in education through the Growsmart initiative, which we offer at 160 Western Cape primary schools. We create job opportunities through Property Point, which is incubating growing Cape small businesses.
42. Also as part of our corporate social responsibility, Growthpoint provides premises to several NGOs including Education Africa, Scatterlings Early Learning for South African Children, Field Band Foundation, and Rise Against Hunger, positively contributing to the lives of thousands of South Africans.
For now, we remain excited to create a great development that benefits the city and all involved.