US Stock Market Crash Hits SA Property Development

Lehman Collapse Resounds in SA

The troubled US bank at the centre of the global stock market woes has financial ties to a massive development in the Cape set to rival Century City. It is through a private equity fund that Lehman Brothers is involved in the R4 billion Annandale Farm development, which is expected to be complete in about 5 years time.

The Annandale Farm development is situated on the N7, not far from Century City, directly opposite the oil refinery. The plan is to build 3000 residential units, as well as 200 000m² of retail, commercial and industrial space.

According to Mike Flax, executive director of Madison Property Fund Managers (JSE: MDN), the Lehman Brothers’ Private Equity Real Estate Fund has entered into a joint venture with the JSE listed property company Redefine (JSE: RDF). Flax said that the fund is off balance sheet and is therefore not caught up directly in the bankruptcy, however the individuals involved in the deal are and they are uncertain about their future.

The South African partners have apparently been told that it is “business as usual” and it is believed that the investment management division is the crown jewel in the company, so the liquidators will want to sell for as much as possible. However, a committee will soon decide whether to continue investing in the Annandale project, which requires around R500 million just for servicing the 70 hectare site (about half the size of Century City).

Flax indicated that the transfer of land has not yet gone through, but the Lehman fund has “invested quite a few millions already”. If their investment does not continue then the other partners will be forced to find a replacement. Several parties have already expressed their interest, including another international bank and the word appears to be spreading like wild fire among South African institutions looking for new real estate opportunities.

According to Flax, Redefine is a junior partner in the project and is not looking to take a larger stake. The whole Lehman Brothers saga has obviously been “very negative for financial services and property in general”. It would also have a negative impact on the supply of credit generally, which is yet another “kick” for the property market, Flax said.

The property asset management expert predicted that a substantial drop of around 3 or 4% in interest rates in South Africa would be necessary if the impact of global economic problems on the domestic market is to be offset. With regard to the impact on Madison shareholders, Flax said that it generates fees from schemes such as this, but Annandale is one of only 40 and the company has not yet budgeted for any income from this particular scheme.

The information in this article is courtesy of Realestateweb (“Lehman collapse hits SA property companies”, 16 September 2008).

South African property sales.