Property harvest dries up for Tongaat

17 March 2019 - 00:11 By MUDIWA GAVAZA

Durban's property market has seen dramatic change since the mid-1990s, particularly along its northern coast where a development boom has transformed sugarcane fields and coastal villages into modern economic hubs.
Much of this development, including King Shaka International Airport and the Gateway Theatre of Shopping, has happened on land owned or previously held by Tongaat Hulett - Africa's largest sugar producer.
Over the past two decades the 127-year-old company diversified from its roots as a sugar producer to get into property development, which was a profitable move initially but is now seen as one of the main reasons for the group's poor performance in recent years.
The company's fortunes took a turn for the worse in 2018 when it reported a R30m loss from its land business, a dramatic reversal of the R441m operating profit the previous year. As at October 2018, Tongaat was owed R1.9bn by debtors who had bought land from it.
Michelle Jean-Louis, Tongaat Hulett's investor relations and communications executive, told Business Times: "A thorough review of the land portfolio is under way."
Tongaat Hulett Developments (THD), the company's property division, has spearheaded land conversion and development activities since 1990, facilitating developments worth more than R70bn, such as Kindlewood Estate in Mount Edgecombe and Bridge City between Pinetown and Umhlanga Ridge.
'World-class success story'
Andreas Wassenaar, principal at Seeff Zimbali - an upmarket residential golf estate north of Umhlanga that was first conceived by Tongaat more than 20 years ago - says THD has been "world class" in its ability to package the land correctly "and deliver the infrastructure through the professional consultants employed".
"Success stories such as Umhlanga Ridge and Cornubia and now the Sibaya Precinct are impressive, and the region has benefited from their strategic and quality approach in unlocking value," Wassenaar says.
Investec's Darryl Mayers says Investec Property bought the land for its R1.8bn Cornubia Mall from Tongaat for R250m three years ago.
Located on the N2 highway, Cornubia Mall is a regional retail centre that seeks to rival the area's largest centre - Gateway. With about 700,000 visitors a month, the new mall pales in comparison with Gateway, which receives up to 4-million visitors a month, according to some estimates.
The mall is part of the 1,300ha Cornubia development, north of Durban and adjacent to Mount Edgecombe, that THD describes as a mixed-use and mixed-income residential and business hub.
Mayers says the region's property sector has faced financial headwinds of late, due mainly to SA's slow economic growth, which he cites as part of the reason for the slow uptake of Cornubia since it opened its doors in late 2017.
Stats SA reported the national economy grew 0.8% in 2018. If this was to reach 2%, Mayers says, the region's property sector would certainly see an upswing.
No profit without investment
The losses may all be part of the normal order of business for a property company. Before it can make any sales, THD, as the developer, has to incur huge infrastructure costs and make a very long-term commitment, says Wassenaar.
Tongaat Hulett owns only 7% of the land on which the sugar that supplies its four mills around the country is grown. The company says this has allowed it to use the land it holds for other activities and it has earmarked more than 7,500ha of "developable prime land" in the Durban and Ballito area.
Of this, Tongaat has so far developed more than 4,000ha, investing R1.5bn over the past three years in 15 new neighbourhoods that have attracted more than 5,000 families to the region.
But as one of the country's biggest landowners, Tongaat has in recent times encountered challenges. Sales have been stagnant for about six months.
"While no further land sales have been concluded since September last year, negotiations continue," the company said.
Wassenaar says that for large-scale land developers such as THD, "the bureaucratic and dysfunctional local authority approval process is a risk and weakness".
An accounting issue
In addition, some analysts believe the company has been wrongly recording the sale of land on credit under its profits column, figures that might have to be restated because of debtors failing to pay what they owe.
Tongaat says it is "pursuing alternative customers and replacement sales for those land sales that have been terminated because debtors have not performed".
But property market players predict Durban and its north coast will continue to grow, especially if there is an uptick in economic growth.
Wassenaar says people moving from Pretoria and Johannesburg to KwaZulu-Natal will continue to mean more new families moving into the area around Ballito and will drive up demand there. "Migration northwards by existing KwaZulu-Natal residents will further support this demand."
Lack of confidence in the police and fears of crime are also fuelling demand for units in gated communities with their own security arrangements on the KwaZulu-Natal north coast.
Despite the slow uptake for Cornubia, Investec is confident that its investment in the area was a good strategic move. As the city expands northward, the mall will be well positioned to foster and benefit from the new neighbourhoods and townships that are built around it. Mayers says good infrastructure in the area and high traffic volumes on the N2 will be good for the mall.
Wassenaar also predicts that scarcity of industrial land will drive growth in that segment.
"In time the Compensation Flats area near Ballito will become the next industrial and commercial development node," he says.

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