Aug 23, 2007:
When Nedbank wanted to offload the property assets it inherited from its BoE acquisition in the early 2000s, there were few takers for what was then considered by many to be the ill-fated mega-mall Canal Walk at Century City in Cape Town
Mid-2003, veteran dealmakers Marc Wainer and Wolf Cesman, of asset managers Madison, together with the Ellerine brothers, picked up the shopping centre for R1,165bn. The mall cost R1,24bn to develop. The deal turned out to be the biggest property coup of the decade.
Four years later the value of Canal Walk - 80% owned by Madison-managed Hyprop Investments - had surged to R3,75bn. It's now not only South Africa's biggest shopping centre but probably also the most lucrative, raking in big bucks for Hyprop's shareholders. The Rabie Group bought the rest of Century City in 2004 and helped turn what used to be a deserted swampland into one of Cape Town's most desirable mixed-use precincts.
However, the Century City success story also left a number of casualties in its wake. In the late Nineties/early 2000s, investors lost millions in the unceremonious demise of former JSE darling Monex, the original owner and developer of Century City. In less than four years the stock plummeted from a high of 1300c to less than 80c/share.
Management blunders were blamed for the company's financial woes and the subsequent delisting of Monex early in 2002. At the time, Monex minority investors were understandably peeved at what seemed to be an overly speedy exit strategy by BoE, which was then the principal shareholder. Despite the losses reported by Monex when Century City first got off the ground in 2000/2001, some questioned why BoE would let a potential gold mine slip through its fingers.
There were also suggestions at the time that the relationship between BoE and Martin Wragge, former Monex CEO and main driver behind Century City, had soured. And when Wragge suddenly resigned amid rumours of insider trading in September 2001, it left more questions unanswered.
Soon after his resignation, Wragge went offshore. Nobody in media circles heard from the enigmatic developer again. That was until a month ago, when Wragge's name popped up in a press release relating to a R4bn mixed-use development in which he's now involved in China.
Finweek tracked down the 59-year-old Wragge to talk about the old Monex days and how he ended up building another "Century City" in China. Asked what exactly went wrong at Monex, Wragge says: "It was a tragedy that shouldn't have been. Had Monex been allowed to work its way into its defined future, it would today be one of the most successful real estate companies in the country. Instead, Rabie and Hyprop are flourishing with those assets.
"At the time, the picture that had been painted of the company's financial position appeared so bleak that people who should have known better - people who knew that Canal Walk and the rest of the business, apart from theme park Ratanga Junction, were firing on all four cylinders - simply threw in the towel and took the handout. So it was with a great deal of sadness that I watched BoE take Monex private at a miserable 80c/share."
But Wragge concedes that Century City was a massive gamble for Monex from the outset. The site was acquired in 1996, when Monex bought embattled JSE-listed developer Ilco Homes. Ilco was indebted to Christo Wiese's Boland Bank (later acquired by BoE) for R80m and was losing R1m/month. Wragge says the bank's break-up value was R56m, but Monex saw big possibilities for the site - notwithstanding the fact that it was zoned for residential development and parts of it were under water.
Says Wragge: "We knew that if we failed to get the land rezoned, we were going to go down the toilet. No cigar. For Boland, Ilco was already a basket case and they couldn't dig themselves out without our kind of expertise.''
Wragge initially had a tough time persuading financial institutions and the retail community that Century City was a logical and viable concept. It was generally dismissed as being overly ambitious and way too capital intensive.
Wragge says Century City was of necessity a grand vision. "Only something of that scale could generate the kind of capital required to overcome the disabilities of the site. When we acquired the land in 1996 it was basically a swampland, under water and with no access to the N1. It had to be a big scheme in order to carry the massive infrastructural cost of making it work at all levels."
Wragge wanted to drive value into the site by establishing a regional shopping centre that would anchor the entire Century City development. "Getting Canal Walk off the ground was always the nut to crack - the key success factor to the whole development. From my experience in developing Tyger Valley Centre, and thereafter quite a bit of the office development around it, I knew that if we could anchor the development with a centre of sufficient scale, everything thereafter would become a self-fulfilling prophecy."
However, getting retailers to buy into a mega-mall concept in the area proved more difficult than Wragge ever expected. "Initially, the retail community was positively hostile to the notion of Canal Walk. The common view was that it would only serve to cannibalise turnovers from existing stores in Tyger Valley, Sanlam Parow, N1 City, Table View, the Cape Town CBD, Cavendish and the V&A Waterfront."
A breakthrough came once the site was rezoned from residential to commercial, with 680 000sq m of commercial bulk approved in one package - at the time believed to be the single largest rezoning ever approved in SA. Wragge managed to convince a few of SA's major retailers to break ranks and come on board. He signed up 15 leases that would take up 60% of the 125 000sq m mega-mall.
"With those leases signed it took us three months to pull together the R1,6bn finance needed for both Canal Walk and what was to become Ratanga Junction. In April 1998, we started construction." But no sooner had construction started than Monex hit a major stumbling block: this time in the form of the Milnerton Ratepayers' Association, which objected vehemently to the location of the amusement park designed to form part of the shopping centre's food court.
"Residents feared that the joyous screams of customers on roller coasters emanating from the shopping centre would keep them awake at night while driving the value of their homes down."
The run-in with the ratepayers' association precipitated a major crisis for Monex. Around R100m worth of roller coasters and other amusement park toys were already being manufactured in the United States and Europe. Instead of running the risk of being locked in a protracted battle in the Cape Town Supreme Court, Wragge agreed to relocate the amusement park to the corner of Century City adjacent to the N1 and Ysterplaat Airfield, where it still stands.
Wragge deeply regrets ever agreeing to such a compromise. "In retrospect, I lost Monex with that decision." Wragge says instead of simply adding dimension to the food court with a collection of high profile coaster rides they now had to make the rides work as a stand-alone attraction. To make the proposition financially viable, Monex had to ensure that the amusement park would be a destination in its own right by pulling and holding people for a minimum five to seven hours per visit.
And so Ratanga Junction was born. Instead of becoming SA's own Disneyland - as it was widely touted at the time - Ratanga became the major source of Monex's money woes. Instead of spending R180m on a few roller coaster rides as part of the Canal Walk offering, the cost of building a fully-fledged theme park with all its infrastructural and administration requirements, including food and beverage support and parking, doubled to R360m.
Up to that point in early 1998 the market clearly liked what it saw in Monex under Wragge's creative and bold leadership. Within two years, the company's market cap jumped from R89m (in 1996, when the name changed from Ilco to Monex) to a hefty R1,182bn. The company simultaneously managed to turn its poor earnings history around: from a loss of R12,7m in 1995 to a profit of R11,4m in 1997.
In 1998, Monex reported a 340% profit rise to R39m. With Monex finally on a roll, Ratanga opened to much fanfare in December 1998. But attendances were terrifyingly thin. Though Monex still reported a profit of R66m by mid-1999 (76% up from the previous year) the market sensed disaster. Its share price dropped like a stone. Within a year, the price was down from 875c to less than 400c/share. Market cap halved to R528m. In 2000, Monex reported a loss of R43m after absorbing a R65m loss in the first year of operation at Ratanga.
Wragge maintains that the loss looked worse than it actually was. "Against my better judgement, the R43m loss included R22,8m of pre-opening expenses at Ratanga, which had been capitalised in the previous year and were now written off. It may have made good sense from an operating and accounting perspective, but I knew it would compound the impact of the loss on the market - which it did."
Wragge says until Ratanga opened, BoE were hands off. "We were perceived to be doing what we had to do and doing it well. We had a great relationship with former CE Phil Biden and his team, which included Tom Boardman, who was very close to us and helped us a lot. We'd taken enormous gambles and pulled them off, one after the other."
But Wragge says the real challenge came in late 1999, when Standard Bank looked as if it were going to default on providing its committed R621m loan to Canal Walk. "That scared the crap out of all of us. Some people in BoE ventured that such a default could take the bank down. The very visible failure of Ratanga had unnerved Standard Bank's management. Although all our equity of R870m had gone into the project and we were on target with the leasing of retail space at Canal Walk, at the critical moment Standard Bank wavered in following through with the loan."
Wragge says that precipitated three and a half of the longest months of his life as Monex struggled to keep construction on course without any money. "Neither the staff, contractors nor the market knew that we were potentially heading for the biggest fall in SA's real estate history."
That put huge pressure on Wragge's relationship with BoE. He lost 27kg during that time. The funding crisis was later resolved after Standard Bank reduced its lending from R621m to R500m. Wragge was given explicit instructions to cut Canal Walk's budget by the R121m shortfall. "I was told that there would be not one more penny in equity."
Well-known Cape Town businessman Mike Rose Innes (formerly head of Invicta Holdings) was then appointed chairman of Monex. Wragge describes Rose Innes as a "no-nonsense" kind of guy. "He arrived with a view that I was a loose cannon. But after a rocky start our relationship settled down as he got to understand some of the intricacies of what we were doing. In fact, he helped enormously in bringing balance to the needs of both companies."
Wragge says the intervention of Rose Innes was particularly valuable during the finishing stages of Canal Walk, when BoE tried to sell off the centre while Monex was still building and trying to lease the space. "That sent signals of distress to the market, which did Monex, Canal Walk and BoE no good at all."
Wragge says in the end Monex finished Canal Walk on time and R121m under budget. He was confident that the loss reported in 2000 at Ratanga could be reversed in 2001, as other Monex divisions had never stopped trading profitably. That was without any contribution from Canal Walk, which was expected to start flowing through from 2001.
"So I was quite bullish going into 2001. I believed we'd be able to report that Monex was on the mend. With sustainable earnings from Canal Walk there for the first time to underpin future income."
That was not to be. Instead, management changed its strategy. Wragge says for reasons he couldn't comprehend at the time the maiden dividend from Canal Walk - which by then had taken off like a rocket - was passed. He believes that though the results would only have been for four months, a maiden dividend would have given shareholders a taste of what was to come. "But Monex shareholders never had a chance to share in Canal Walk's success - a perpetual pleasure now reserved for Hyprop shareholders."
By the time the second dividend came around, Monex was no longer listed. Wragge claims that the Monex board then set about decimating Monex's net asset value, writing off R264m. "Most of that was in respect of Ratanga, which could be justified to a degree. But a big chunk was also in respect of Canal Walk, with which I had major difficulty. Instead of coming back in 2001 and reporting a profit of around R30m - including a proportional contribution from Canal Walk - we reported a catastrophic loss of R243m."
Wragge says that left the market with the impression that Monex's position was virtually irredeemable. "It looked as if Monex was going to get sucked down the tubes. To me, the opposite was true. We were successfully overcoming all our problems and, given a little elbow room, I could see lots of blue sky ahead. We were fixing Ratanga, having got it to virtual break even, with the prospect of a small contribution in following years. And we had delivered Canal Walk."
Wragge says Canal Walk was in fact performing better than projected and demand for residential and office space was picking up. "What more could we ask for, except to be cut loose to get back to our knitting while our masters worked on getting back to theirs."
It was by then clear to Wragge that BoE saw a future without Monex. Its stake in Monex - specifically Ratanga - was perceived to be damaging BoE's share price and market cap.
"BoE just wanted out - any way possible. So Monex was to be restrained from doing what it had been doing successfully for 20 odd years... a pitiful waste of fabulous assets and an enormously skilled development team."
After the completion of Canal Walk, no new development initiatives were sanctioned, not even residential, says Wragge. "Instead, we were compelled to liquidate what we could in an attempt to make Monex debt-free - which would have been exemplary for a real estate company with the 33% stake we had in Canal Walk and the enormous land bank we were in the process of realising in Century City."
Wragge says Monex's debt at the time amounted to less than the equity investment in Canal Walk. "Instead of going forward with such obvious opportunities as the Bell-ville Waterfront - which we'd been itching to start - it was sold to another developer who implemented our plan and made an immediate killing."
Wragge estimates that the Bellville development generated a profit of around R100m. Monex sold it for R22,5m. It was that sort of "slash and burn" action that put him at serious odds with BoE management, says Wragge.
Then in mid-2001 Wragge sold some shares without timeously reporting the sale, something he says he then didn't know he was required to do.
"I reported the sale routinely when next I saw the other directors and was advised that I should report it immediately, which I did the same day. I sold less than 1% of my holdings for the equivalent of about a month's salary. It was not to my mind a big deal."
Wragge says the reaction that followed from the media was staggering. "Accusations of insider trading - although dismissed at the time by Tom Boardman as a nine-day wonder - put my relationship with BoE management under additional strain.'' Wragge says he made an innocent error. The Financial Services Board (FSB) later found no grounds on which to pursue the matter. "Unfortunately the FSB's decision took months in the coming. By that time a substantial amount of damage had been done to my reputation, damage that lingers today."
That same year, in September 2001, Wragge resigned. "I was exhausted. I'd been at odds with the new BoE team for almost two years. I was against the sale of Canal Walk, because I knew what it would do for Monex. Moreover, I was against the sale of the 100 plus hectares of remaining commercial land at Century City, which I valued at more than R1bn. However, the BoE guys wanted it sold at almost any price - anything to realise cash quickly. So with the writing on the wall, I took my leave." A week after Wragge resigned he went to China as part of an SA trade mission. Wragge says he got bored, started wandering around the streets and spotted an opportunity to build another Century City between the merging twin cities of Yinchuan, the capital of Ningxia Province. "I asked to see the mayor, who was so taken by the idea that four days later I had a conceptual deal to build 1m sq m of bulk on a 180ha site."
Wragge took the concept to a few British contacts - people who were involved in Monex's £2bn (R28bn) joint venture bid in 2000 to redevelop The Dome in London.
The capital for the China project - named Forest Park - was raised through the British-based China Development Company. Wragge was made its CEO. Many of his former Monex colleagues later joined him in China. Wragge's team at Forest Park has already completed more than 1 000 apartments, 400 villas, a public park - now managed by ex-Ratanga people - and 11km of canals.
Wragge plans to return to SA full time within the next three years, once the R4bn project is completed. "I want to slow down, smell the roses and spend more time with my four-year old daughter. A studio in LA wants to make a movie of a script I have written, which I would like to direct when I get the time."
Wragge has over the past two decades produced three motion pictures, one of which he also directed, which apparently fared "adequately" at international box offices. But he won't be leaving the development game for good. The SA development arm of Leisure Retail Property Solutions (LRPS), of which Wragge is CEO, still operates from an office in Canal Walk. Last year LRPS completed the Mountain Mill Shopping Centre in Worcester, together with Retail Africa. The company is involved in a 20-hectare commercial township and a 200-hectare residential township in Worcester. It is also redeveloping Pier 14 (some 37 000 sq m) in Port Elizabeth.
Wragge has his sights set on two more developments on the scale of Century City in southern Africa. Given his track record, there's no doubt that Wragge has the ability to make them happen.
How hyprop's R1,65bn bet paid off
"When we bought Canal Walk from Nedbank in 2003 everyone thought it was a dog," says Marc Wainer. The market couldn't have been further off the mark.
Wainer and fellow industry stalwart Wolf Cesman - co-founders of property asset manager Madison - secured the Cape Town mega-mall for R1,165bn. It's currently worth R3,75bn - a profit of R2,58bn within four years. In terms of return on cost, Canal Walk has no doubt been the deal of the decade.
Shareholders of Hyprop, one of the listed funds managed by Madison, are the main beneficiaries of Canal Walk's spectacular growth story. Hyprop owns 80% of the centre, with the Ellerine brothers holding a 20% stake.
At the time Wainer and Cesman were bidding against three other suitors for Canal Walk, including Liberty Life, Old Mutual and a Grayprop/Sycom consortium. Cesman says their price wasn't initially the highest. But it was the most attractive, as it was the only clean offer on the table with no conditions attached. And that's what Nedbank clearly wanted back then, says Cesman. As soon as they took ownership of the centre in October 2003, Wainer and Cesman changed the management team, drastically cut back on expenses, tweaked the tenant mix and let the vacant space. Initially, 12% of the centre's total 130 000sq m was empty. Vacancies are now down to less than 1%.
Says Cesman: "There was no rocket science involved. We applied the basics. Nedbank didn't have experience in property management and we knew that the centre offered turnaround potential."
However, both Wainer and Cesman concede they had luck on their side. Soon after Canal Walk was acquired, SA's economy turned and consumers started their spending spree in earnest.
Says Cesman: "It's easy to look clever afterwards, but at the time there was a fair amount of risk involved, as the bulk of the leases were coming up for renewal in 2005. If retail spending turned against us - which was a possibility at the time - we wouldn't have been able to pass increases on to tenants."
However, by 2005 sales turnover was rocketing and Wainer and Cesman managed to get the rental increases they were hoping for. "We also can't take credit for the brilliant design and layout of Canal Walk," says Cesman. "It's magnificently built. We need to spend very little on refurbishing the centre over the next 20 years."
Key question is how long will Hyprop hang on to the mall? With so many offshore asset chasers sniffing around, you'd assume that cash-flush overseas buyers are prepared to pay a hefty premium for a landmark property such as Canal Walk. "That may be so - but we're not selling,'' says Cesman.