BUQS 5031A
GROUP ASSIGNMENT:
“MPSA – BROADACRES SHOPPING CENTRE”
By KDRC Properties
For
Asset X (Pty) Ltd
October 2023
Name & Surname
Dirang Setshogoe
Caitlin Mackenzie
Ryan Wolter
Kenneth Msomi
Student Number
538695
1615149
1602119
511016
Table of Contents
i.
List of Figures
3
i.
List of Tables
3
Executive Summary
4
Part 1 Ownership Goals and Objectives
1
Part 2 Physical Description
1
Part 3 Management Description
5
Part 4 Market Analysis
7
Regional Analysis
7
Population figures
7
Residential and commercial development
8
Transportation
9
Consumer Market
9
Neighbourhood Analysis
10
The subject property
10
Tenant Mix
11
Summary and Conclusions
Part 5 Financial Analysis
12
13
As-is Financial Description:
13
As-Is Owner Goals
17
Pro Forma Statement As Is
19
As Is Before Tax Cash Flow
20
The Results Of The Four Tests
21
Part 6 Issues and Concerns
23
Competitive Position Of The Property
23
Conditions of the Shopping Centre
23
Staff, Management and Operational procedures
26
Part 7 Alternative Capital Improvements
30
Summary of the Alternative improvements
30
Decreasing Expenses
32
Increasing GPI
33
Part 8 Summary & Recommendations
35
References
36
i.
List of Figures
Figure 1: As-Is Organisational Chart ....................................................................................... 6
Figure 2: Regional Map of the centre with a 5km radius (CalcMaps;2023) ............................. 7
Figure 3: Zoning Scheme as per CoJ (CGIS;2023) ............................................................... 10
Figure 4: Proposed new structure for Asset X (by authors) ................................................... 28
i.
List of Tables
Table 1: Management Description ........................................................................................... 5
Table 2: Buildings completion for Residential and Retail (Statistics-4;2021)(Quantec;2023) .. 8
Table 3: Tenant Mix to date ................................................................................................... 11
Table 4: AS-Is Gross Potential Income .................................................................................. 13
Table 5: As-Is Vacancy Losses ............................................................................................. 14
Table 6: Miscellaneous Income ............................................................................................. 14
Table 7: As-Is Operating Expenses ....................................................................................... 16
Table 8: As-Is Maintenance ................................................................................................... 16
Table 9: As-Is Administration ................................................................................................. 17
Table 10: As-Is Fixed Expenses ............................................................................................ 17
Table 11: As-Is Acquisition Expenses .................................................................................. 17
Table 12: As-Is Pro Forma Statement ................................................................................... 19
Table 13: As-Is Before Tax Cash Flow ................................................................................. 20
Table 14: As-Is Four Test Result ........................................................................................... 21
Table 15: Test Results Matrix ................................................................................................ 22
Table 16: Issues Ranked for Capital Improvement ................................................................ 30
Table 17: Implication of Alternative Improvements ................................................................ 31
Table 18: Improvements fitted into Budget ............................................................................ 32
Table 19: GPI increase - Marketing ...................................................................................... 33
Table 20: GPI increase - Facade Upgrade ............................................................................ 33
Table 21: GPI increase - Technological Upgrade .................................................................. 34
Executive Summary
The below management plan aims to set out a plan to maximise the Broadacres Shopping
Centre’s potential as well as meet the requirements of the owners, Asset X (Pty) Ltd. The
management plan is presented by KDRC Properties, which is a specialist property
management company which was founded in 2010.
It is noted that Asset X has the main goal of achieving an internal rate of return of 31.85 and
intends to hold the property as an asset for a minimum of 5 years. Asset X would also like to
explore possible ways to expand revenue generation through, for example, marketing
campaigns.
Broadacres shopping centre is a 13 year old, ±30,000m² shopping centre located in the heart
of Morningside, Sandton. The property was previously managed by Arena Property Group
whose standard of service was not satisfactory, hence this management plan provided by
KDRC Properties. There are multiple areas of the property that need urgent attention such as
the landscaping, security, water consumption and fire infrastructure.
All current issues will be discussed and possible recommendations from KDRC Properties
will be made with regards to how the issues should be mitigated. The current management
structure of all staff of the centre will also be assessed and more effective alternatives will be
presented for consideration.
The report will then undergo a full financial investigation which explores all revenue and
expenses that the centre is incurring and how required capital expenditures can be effectively
built into the budget. All expenditures will be justified and possible additional income
generating ideas will be explored.
Part 1
Ownership Goals and Objectives
The management plan aims to provide a complete analysis of various approaches that the
management of Broadacres Shopping Centre could implement to ensure that the
performance of the property as an asset best aligns with the owner’s goals. These
approaches are guided by analysis undertaken on the physical property, its financials and the
market. Taking all of this into consideration, the best course of action can be formulated.
The objectives of Asset X (Pty) Ltd (Owners of Broadacres Shopping Centre) are:
·
Own the property for at least 5 years (financial projections will be done for 61 months)
·
The property aims to achieve an IRR of 31.8%
· Overall good management and investment into the property to ensure that it holds and
increases its value
·
Attracting new streams of income and bolstering current streams
·
Marketing initiatives that stimulate consumer loyalty
·
Cash on cash return of 9.4%
Part 2
Physical Description
Introduction to Broadacres Shopping centre (Fictitious)
Broadacres shopping centre is located on the corner of Rivonia and Outspan Road in
Morningside, Sandton.
Site description
The shopping complex comprises a total of 30,000m² and is defined as a large community
centre. Currently the centre is 13 years old and is rectangular in shape. It is important to note
that because of the fact that the property is over 10 years of age, one can reasonably expect
higher expenditure towards aspects such as maintenance and operational costs. In terms of
topography, the centre is on a level plane and there is no slope gradient detected. In terms of
the zoning, the site is zoned for business/retail purposes although it forms part of a residential
node.
Structure analysis
Structurally, the building is relatively sound. The main structural problem that one can
observe is that the site drainage is problematic. This is due to the undetected corrosion that
has accumulated in the basement pipeline. Furthermore, the feature fountain in the piazza
has been neglected by previous managing agents. It is assumed that the correct chemicals
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were not utilised and hence corrosion occurred. It is estimated that the existing pipe
infrastructure has a maximum working lifespan of 3 years before requiring replacement
Access and current ingress and egress
Currently the shopping centre has two main entrance / exit ways. One on Rivonia Road and
one on Outspan Road.
It is noted that there is a need for an additional pedestrian entrance in between the current
access routes. The best location for this would have to be determined and consider aspects
such as what security measures would have to be implemented as well as how the
landscaping would have to be adjusted. In terms of signage, the signage pillars at the
entrances are currently quite small and deteriorated. There is an opportunity to upgrade the
signage so that the tenant names are bigger and catching to the eye.
Parking
There are a total of 200 parking bays. The centre charges a standard $300 monthly for
casual parking. 71 of the 200 bays are leased by tenants and prescribed rates per bay as
listed below:
Pick n Pay: 25 bays @ $100 per bay
Shoprite: 23 bays @ $100 per bay
Studio 88: 2 bays @ $180 per bay
Ackermans: 4 bays @ $150 per bay
Pep: 5 bays @ $150 per bay
Chicken Licken: 2 bays @ $195 per bay
Mugg & Bean: 3 bays @180 per bay
Pep cell: 1 bay @ $150 per bay
Liquor boys: 2 bays @ $250 per bay
The Butcher: 3 bays @ $250 per bay
Lovisa: 1 bay @ $250 per bay
Landscaping
Overgrown grass: there is approximately two metres of overgrown grass around the
perimeter of the centre.
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Unkept foliage: In general the foliage on the property requires cutting back and neatening
up. Most importantly, the foliage around the security room is overgrown and needs to be cut
back as it is hampering visibility from the room which is a security threat. There are also
areas of municipal land around the property that have unkept foliage. Previous managing
agents tried to contact the council to have it maintained with no success. It is advised that for
municipal areas around the property that are unkept, the maintenance budget is expanded so
that those areas can be attended to.
Poor CCTV cameras: The CCTV cameras currently installed are not of a good standard and
it is advised that they are upgraded throughout the property.
Planting choices: There were previous proposals to plant rose bushes and other alien plant
species throughout the property. However, this was turned down due to unsuitability. It is
advised that a horticulturist or local landscaper is consulted to provide a plant list that
contains indigenous and water wise plants that will require very little water and general
maintenance so that they look good all year and cost the landlord less.
Grass: The grass has slowly deteriorated due to constant stepping on from pedestrians,
hawkers and commuters. The best solution would be to redo the grassed areas with a userfriendly design that responds to the movement patterns of the people so that the spaces can
remain attractive to the eye by still being functional. The possibility of paving certain areas is
an option to investigate.
Analysis of major systems
Cooling tower: a cooling tower is used by the building which has a remaining lifespan of 10
years before it will have to be completely replaced. It is noted that the cooling tower accounts
for 30% of the electric expenses and therefore more efficient or alternative solutions need to
be investigated.
Lighting: The centre uses T12 fluorescent bulbs with incandescent light bulbs
Metering: It is noted that during mid-night hours, consumption is recorded. Some thought
and consideration needs to be given to alternative solutions such as installing a bulk metre
that will connect to all water and plumbing lines.
Water: It seems that there is some unaccounted for water usage. The landlord requires that
the cause of this water loss is determined so that a solution can be implemented. It is also
important to explore ways to harvest rain water to reduce water consumption for landscaping
irrigation and toilet flushing. A suggestion would be to consult a water harvesting company
who could advise how best water can be captured, stored and treated. Estimates could also
be provided that give an indication of how much water and money can be saved each year to
see if the strategy is feasible.
Internet connectivity: The current internet connectivity is not efficient. It is noted that
ideally, an internet upgrade should be undertaken. Previous discussions and proposals for an
upgrade were not convincing enough for the landlord and hence not implemented. This report
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will address the pros and financial implications of upgrading the internet connectivity of the
centre.
Roof: It is noted that parts of the roof are faulty and could pose an Occupational Health and
Safety risk. These faults are not of critical concern and it has been determined that with
proper maintenance, the roof can be maintained. However, the roof could be completely
replaced at a cost of R170,000.00 or maintained monthly at R5,700.00 which will be added to
maintenance costs. Financially, the implications of replacing the roof or maintaining it monthly
will have to be considered and concluded in this report.
Fire: It is estimated that only about 10-15 smoke detectors are operational and the sprinklers
are also not functional. The landlords keep on deferring this problem. However, should a fire
break out, there could be serious financial implications should the insurance company refuse
to pay out the claim on the basis that the fire equipment was not maintained
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Part 3
Management Description
Historic management:
The original managers of the property were Arena Property Group (APG). APG was
appointed when Asset X (Pty) Ltd purchased the property. It was noted that the property
required a more competent property manager, hence the preparation of this document.
Elements such as the water feature needed urgent attention and no suggestions were
forthcoming from APG. The operations manager is relatively comfortable when it comes to
maintaining electrical elements. However, he lacks knowledge on water and plumbing
systems.
DESCRIPTION
CENTRE
MANAGER
OPERATIONS
MANAGER
RECEPTIONIS
T
SECURITY
SITE STAFF
All
administrative
functions
Technical and
administration
on operations
side
Assist centre
manager
two D grade
guards
Work on site, do
not get medical
aid or pension
Only has matric
level
qualification
Grade B
supervisor
Table 1: Management Description
The clients requested that the receptionist not get delegated too much work, which frustrates
the centre management as the receptionist is hard working and always willing to stand in for
the centre manager.
To determine if the current site staff are suitable, a Job scoping and Role definition needs to
be carried out on the existing staff complement to determine where appropriate changes
need to be made.
Altra Solutions operate both the cleaning and security functions. It is noted that Altra
Solutions do not correctly and fairly remunerate their staff. This is problematic as it leads to
laziness and less motivation to work, meaning that the property will start to deteriorate from a
cleanliness point of view and security breaches may become more likely. The staff’s main
complaint is the hours that they work as well as not being paid for overtime. There has also
been much unrest with some staff from Altra setting up pickets etc outside of the premises
and involving the CCMA. This is dangerous territory and we believe that a solution to this
needs to be found to avoid negative media coverage on the centre. The two outcomes to
possibly explore would firstly be to hire another cleaning and security company, or employ
cleaners and security directly as staff of the centre and remove the need for third party
services.
It is important to note that the centre manager has received another offer from a competing
centre. She was offered $90,000.00, while she is currently earning $60,000.00. Seeing as
she has been at the centre for quite some time and is familiar with the centre and the staff, it
is advised that the centre try to retain her. However her absence in an unstable centre does
not assist the running of the centre. A solution to her is discussed further on
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Staffing organisational chart (As is)
Figure 1: As-Is Organisational Chart
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Part 4
Market Analysis
The purpose of this section as a market analysis is to help the client, Asset X understand the
dynamics of the current economy, social demographics, the consumer market and
performance of the real estate market. By understanding the strengths and weaknesses of
the topics above,KDRC Properties would propose how these aspects affect the
recommendations put forward for their asset, being Broad Acres shopping centre.
Regional Analysis
Figure 2: Regional Map of the centre with a 5km radius (CalcMaps;2023)
Situated in Morningside, Broad Acres centre falls under the region of Randburg within the
metro of Johannesburg. This consists of affluent suburbs such as Sandhurst, Hyde Park,
Rosebank, Illovo, Bryanston and Woodmead amongst many others.
Population figures
The City of Johannesburg (CoJ) is estimated to have a 6.23 million population as of 2023.
This is a massive incline from the 2011 figure estimated at 4.4 million. Despite a y-o-y
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population decline from 2022 to 2023, CoJ continues to have the highest population growth in
the country which is a strong signal of its employment contribution to the country.
Within the CoJ, the Formal employment class (non-agricultural) from Q1 2022 to Q1 2023
has experienced a y-o-y growth of 1,410 million(StatisticsSA-1, 2023), indicating that the
main driver of growth is employment . Within the formal employment sector in the year 2021,
figures from (Quantec, 2023) show that the FIRE sector [I08] contributed the most with 132
billion rands in total nominal compensation for an estimated 478,000 employees. This sector
is the carrier of employment in the metro.
Residential and commercial development
Table 2: Buildings completion for Residential and Retail (Statistics-4;2021)(Quantec;2023)
As per Table 2 above is extracted from Stats SA buildings completion publication and the
Quantec version which only has the 2022 stats to record. We can see from the supply side of
the property market the impact of Covid-19 on the industry. Stock supply has taken a shock
overall with the CoJ region but also provincially and nationally. For CoJ we can however see
a massive improvement in the retail sector supply with the introduction of the Kwena mall in
the West Rand being a large contributor (Businesstech;2022).
The retail asset class will see the arrival of the 10,000 sqm Eyethu Shopping Centre in
Soweto by the end of 2023 (Businesstech;2023). The post-covid recovery of the retail class is
also witnessed on a metro, provincial and national level as seen on the 2022 figures in
comparison to the CoJ’s.
The supply of the residential asset class on all levels from Metro to national seems to have
taken a serious knock from the post-covid era, not much supply is taking place, which might
indicate that demand is reducing as a result of macroeconomic factors i.e high interest rates
and inflation.
Also interest rates would have a similar effect on debt-servicing new developments hence the
hesitance to continue with building completions.
Considering a constantly growing population due to employment, the lack of new residential
developments might also suggest an over supply which needs absorption before new
developments can increase stock.
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From a demand side, the CoJ metro vacancies for community shopping centres (according
to the Rode time series 2022) has approximately stayed around 10.1% to 10.9% in 2022
showing demand in the asset class is stable. For the residential asset class the same series
shows an increase in the rental price from bachelor to 3 bedroom apartments. flat vacancies
have reduced from 12.7% Q1 2022 to 8.7% in 2022Q4. as of Q2 2023 this has changed to a
vacancy of 10%. (RodeReport, 2023)
Transportation
The University of Warwick conducted a study which indicated that individuals have
preference for one way commute to work lasting no longer than 16 minutes should
circumstances allow (Hudson, 2022). In addition to this, the study examines Norway,
renowned as being a “happy” country and concluded that the maximum one way commute
radius of 5 kilometres which would presumably allow for a approximately 16 minutes of road
travels with the modes of transports highlighted above has a direct impact on increased
productivity, happiness and overall quality of life. Consequently, for the purpose of this
analysis we will establish a maximum travel distance
Seeing from Figure 2, the subject property sits well within the northern suburbs of
Johannesburg with the 5km radius indicated, having main feeder routes from Rivonia Rd,
William Nicol, Grayston Drive which all have easy access to the main highways. The subject
property is well located and allows for a large population to utilise the centre. The centre is
mainly accessible through Rivonia Road which has high traffic leading to the in-and-out the
highway. Rivonia road also has bus stops used for public buses and also the Gautrain
allowing for those coming outside the immediate region to make use of the centre. Such
transport facilities also allow for workers employed by the tenants to access the centre easily.
There are sufficient auxiliary routes around the centre allowing for good circulation of vehicles
for the immediate neighbourhood residents.
Consumer Market
As of Q2 2023, South Africa consumers still find economic challenges in relation to high
interest rates and CPI inflation on goods. According to the SA national bank (SARB), precovid lending rates were at 6,5%. This dropped to a low of 3,5%, at a peak time of covid-19.
During the y-o-y period from Q1 2022 until Q2 2023 the country has seen a rise from 4% up
to a massive 8,5% (SARB, 2023).
As per findings of Stats SA Gauteng with the highest CPI weight per basket at 36,29 has
experienced a y-o-y increase in CPI going from 102,4 to 109 from Q2 2022 – Q2 2023.
Specifically, by suburban nodes, items such as Foods (15,3 CPI weight) has undergone a yo-y CPI increase of 15,9%. Transport (14,35 CPI weight) at 7,6% rise and Insurance Services
(9,89 CPI weight) by 11,6%. (StatisticsSA-3, 2023, pp. 4,7-8) . Alcohol has increased y-o-y
from 104,8 to 112,0 and tobacco’s y-o-y from 104,4 to 109,5.
With the cost-of-living so high consumers disposable income has been reduced. Also with
wages earned not increasing at the same rate, less of the population are spending and are
rather concerned with saving. This has a negative impact on the real estate market
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(residential and retail specifically) as landlords have less security on the rental commitment
from tenants.
Neighbourhood Analysis
The subject property
The Shopping
Centre, is zoned as
special as
indicated by the
Zoning Scheme
(CGIS;2023),
however the
property is utilised
as business
(Retail) and is
situated in a highly
concentrated
residential area in
the suburb of
Morningside
Figure 3: Zoning Scheme as per CoJ (CGIS;2023)
The shopping Centre as mentioned is a Community Centre that has catered successfully to
the large residential catchment in the area. Its main feeder road is on Rivonia Road, located
well considering the high traffic congestion and potential footraffic it brings to the centre.
Travellers by bus via the Gautrain also have access with bus routes travelling through
Rivonia Road. The centre has good entry and exit points through Wagoo and School road on
the back end side of the property.the Boundary has sufficient walkway space, allowing for
pedestrian-friendly access and the boundary line is fenced supplemented with a large amount
landscaping with trees and shrubs along the fencing of the mall.
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Tenant Mix
Table 3: Tenant Mix to date
Based on the above tenant payroll spreadsheet, anchor tenancy is shared between Pick N
Pay and Checkers supermarket. In-line tenants vary and there are 3 vacancies which are
contributing to the loss of income.
The tenant mix appears to be conservative most likely taking into consideration that the
centre is situated in an area with high residential zoning – hence the centre tends to facilitate
convenience shopping of day-to-day needs.
The outlook on tenant mix will have to change considering the foot traffic loss that has taken
place as a result of new retail development close to the centre.
The Rosebank Mall shopping Centre is a great example of a successful change in tenant mix
– also considering that the mall is older than the subject property.
Prior to Covid-19 the food court section had vacant spaces where restaurants such as Proud
Mary, Mamasamba, Coco Safar, Modern Tailors and the Omen Bar have all been effective in
uplifting an existing shopping centre food court to having more life in the centre. It has the
advantage of being in a business zoned node and partially residential, however it still is
sufficient as a precedent of Broad Acres.
Outside of the vacant stores some of the misaligned tenants as discussed below:
Chicken Licken – this tenant is not usually located in upmarket suburbs unless it is within a
Super Regional Centre. Neither is Studio 88. The demand for their product within the
northern residential suburb of Morning side is misaligned to both their target markets.
As the lease is still valid for such tenants there cannot be a termination on that by the
landlord’s forcing. However, it is advised to not renew their lease within the holding period of
Asset X.
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Summary and Conclusions
In conclusion of the analysis of the real estate market, there are several predictions one can
make taking the factors of demand and supply in order to mitigate the risk of suggesting
ineffective strategies for the Broadacres centre.
From a demand side, consumers seem to be under pressure considering the inflation of
goods and also from growth in rental prices increasing in the market as debt servicing for
landlords increase in line with interest rates. However, with the price of consumables such as
alcohol and tobacco increasing, this indicates a response from the consumer market,
showing demand for such products despite less disposable income being available.
From a supply side, the real estate market seems to be showing resilience in the retail market
with a y-o-y growth in retail stock from 2020-2021 and also from 2021-2022. This could imply
that investors and developers are noticing the importance of the retail market in regard to its
ability to respond to the consumer market as indicated with the CPI indexes.
Taking the success of Rosebank mall, the demand for food, alcohol and tobacco as seen in
the rising price in CPI indices mentioned previously, the Broad Acres centre could benefit
from restaurant & bar tenants that are bespoke in branding to bring a different market to the
centre and also diversify the tenant mix already in the centre.
With Studio 88 being a weaker tenant in relation to the consumer profile within the immediate
suburb, its 500m2 space could cater better, for example, to medium sized Clicks or Dischem
Store - to add a tenant that speaks to convenience shopping. The vacant spaces catering to
the food and alcohol services with bespoke restaurant brands can complete the resit of the
vacant spaces.
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Part 5
Financial Analysis
As-is Financial Description:
Income:
Gross Potential Income:
As instructed, the GPI for the centre is calculated as the maximum amount of rent which could
be brought in if the centre is fully let. As per Table 4: AS-Is Gross Potential Income, this was
done to calculate the current rack rent of the centre at R33,859,200.00 at Year 0. This was
achieved by multiplying the square
meterage occupied by each tenant by the
annual amount per square metre and
summing the total. To get the GPI at Y1,
where the provided spreadsheet model
commences, the amount is increased by
10% as per the brief. This results in an as-is
Y1 GPI of R38,260,896.00,.
Table 4: AS-Is Gross Potential Income
Loss to Lease:
The Loss to Lease amount is lost income on leases through making incentive offers to tenants
who we would hope to lease a store to. This is given as an amount of R750,000.00 per month
and therefore R9,000,000.00 per year. This makes up almost half of the GPI and should be
considered. This will increase at a rate of 9% as prescribed.
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Vacancy and Collection Loss:
The vacancy and collection loss is made up of
arrears accounts and revenue lost through vacant
space. As prescribed, this is calculated at 10% of the
GPI and will increase at 9% annually.
Table 5: As-Is Vacancy Losses
Net Rent Revenue:
Net Rent Revenue is equal to the GPI less the Loss to Lease and Vacancy and Collection
losses. It is sitting at R25,434,806.00 for Y1.
Miscellaneous Income
The Miscellaneous Income is currently made up of the Parking income. The amount is
R933,480.00 at Y1 and increases at 10% annually. This was calculated using the following on
Table 6:
Table 6: Miscellaneous Income
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Utility Reimbursement:
The utility reimbursement is given as 40% of R75,000.00 per month. This results in R30,000.00
per month and R360,000.00 per year, increasing at 10% annually.
CAM Reimbursement:
The Common Area Maintenance Reimbursement is a fee contained in leases that cover the
costs of maintaining communal areas. The amount a tenant pays is proportionate to the amount
of lettable area they occupy within the building.
Effective Gross Income:
The EGI is R26,728,286.00 at Y1. The EGI is the Net Rental Revenue plus the other income
sources.
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Operating Expenses
The operating expenses were calculated using the following tables. All expenses are assumed
to increase at 9% annually as per the brief. The individual sections are elaborated on in the
following paragraphs.
Utilities:
The Utilities are made up of Heat, Electricity, and Water. The water is currently the most
expensive utility by far and should be addressed at some stage. This is probably due to the
building’s plumbing issues. There is an option in the Capital Expenditure Section to upgrade
the plumbing. This will be analysed later on a cost-benefit basis with the rest of the CapEx
options. The Utilities total is at R2,205,600 at Y1
Table 7: As-Is Operating Expenses
Maintenance:
The maintenance line items are made up of the general day to day maintenance needed in the
building. The main areas of concern are the plumbing, which is relatively high due to the ageing
system which is being considered for upgrade, and the maintenance and security expenses
which is an issue involving nepotism from one of the directors. These issues will be discussed
further in later sections. The total maintenance cost of the ageing Broadacres Centre is
R1,309,800.00 annually.
Table 8: As-Is Maintenance
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Administration
All administrative costs are given as a monthly figure, and are converted to an annual figure
and added to the sheet like the rest of the given expenses. The total administrative cost per
year is R1,918,038.00.
Table 9: As-Is Administration
Fixed Expenses
The fixed expenses are also given as monthly figures and have been converted to annual
costs. All expenses are assumed to increase at 9% annually as per the brief.
Table 10: As-Is Fixed Expenses
As-Is Owner Goals
The purchase price of the property is given at R150,000,000. It is further given that the owners
were required to put in 30% equity. This results in a loan Amount of R105,000,000.00 and an
LTV of 70%. Prescribed Loan Pre-paid points are applied at 3%.
The going-in Capitalization Rate is calculated at 10,50%. This figure was taken from the Q2
2023 Rode Report, which provides 10,50% as the Capitalization Rate in Johannesburg. A
going out capitalization rate of 12.5% was selected to account for possible risk in the 5 year
period.
The Acquisition Expenses are calculated as the brief, using Table 11:
Table 11: As-Is Acquisition Expenses
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The Mortgage Point Fees on the loan are given as 2 points. Mortgage point fees are
calculated as 1% of the loan per mortgage point. With the loan of R105,000,000.00, this
results in R2,100,000.00 worth of mortgage fees.
Evaluation of Alternatives
There have been two alternatives that were tested to determine their suitability and
adherence to the following ownership goals:
· Retain ownership of the building for at least five years
· Achieve a required return of at least 30% in the holding period of 5 years
· Achieve a cash return (Y1 R,R%) of not less than 9,4%
· Operate the property to achieve an IRR of at least 31,8%
· Enhancing the value of the property (value enhancement) of R167 750 000
Alternative #1: As Is
The first alternative is maintaining the property in its “as is” condition.
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Pro Forma Statement As Is
Table 12: As-Is Pro Forma Statement
The Gross Potential Income was derived by multiplying the market rental for each tenant with
the square metre that each tenant occupies. The Gross Potential Income is planned to
increase by 10% year on year. Effective Gross Income for the holding period of five years
amounted to R26 million, R29 million, R32 million, R36 million and R39 million respectively.
The expenses are planned to have an annual escalation of 9% per expense line item. All the
operating expenses which includes utilities, maintenance, and administration will have a 9%
annual escalation. Within the holding period of five years total operating expenses were
respectively R7,9 million, R8,6 million, R9,4 million, R10,2 million, and R11,2 million. The Net
Operating Income over the holding period was respectively, from year one was as follows
R18 million, R20 million, R23,1 million, R25,7 million, and R28,5 million.
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As Is Before Tax Cash Flow
Table 13: As-Is Before Tax Cash Flow
In order to derive the BeforeTax Cash Flow, all the key variables like the Loan amount,
Interest rate, Amortisation period in years, the beginning month analysis, Owner’s required
rate of return and the going in Capitalisation rate. The achieved Before Tax Cash Flow within
the holding period was respectively R9,9 million in year 1, R12 million in year 2, R14,3 million
in year 3, R16,9 million in year 4 and R19,7 million in year 5. The initial purchase price for
Broadacres shopping centre was R150 million, financed in a capital structure with a mix of
Debt of R105 million and Equity of R45 million, providing a Loan to Value of 70%. At
reversion in year 6, the sale price is R253 million, with net proceeds of R149 million.
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The Results Of The Four Tests
The following are the results of the four tests under the as-is scenario:
FOUR TESTS OF INVESTMENT RETURN: Year 5
Year 1 $/$%
Value Enh.
14,18%
$74 707 770
Table 14: As-Is Four Test Result
NPV
IRR
($1 431 384)
31,12%
(a) Cash on Cash Rate of Return (R/R%)
This test examines a one-year period and is calculated by dividing one year's before-tax cash
flow by current equity. The cash-on-cash rate is important for calculating the return on any
new capital investment in real estate. Cash-on-cash for Year 1 in the as-is scenario is 14,8%
for year 1, calculated as follows R9 971 617 / R70 323 364.
(b). Value enhancement
This test subtracts the starting value and the cost of any capital enhancements from the
predicted value at the end of the holding term. It is a measure of return over two time
periods—acquisition and disposal. It does not account for the effect of time value of money.
The value enhancement in the as-is situation is R74 707 770.
(c) Net Present Value (NPV)
This test determines whether a certain investment will match the owner's desired rate of
return. The test presupposes that the property is purchased for a fixed price and that a
sequence of cash flows, including the cash flow from a future sale, would be derived. These
inputs are tested for the investor's chosen discount rate. If the NPV is positive, it suggests
that the property's performance will exceed the owner's expectations. If the NPV is negative,
the investment will fail to match the owner's expectations. The tested discount rate is equal to
the Internal Rate of Return (IRR) if the NPV is equal to zero. The NPV in the current scenario
is (R1,431,384).
(d). Internal Rate of Return (IRR)
This test is most useful for differentiating rival investments (or alternative schemes for the
same investment). The inputs are the initial investment, the periodic revenue streams (cash
flows), and the selling income. The IRR is the end result. If all other criteria are equal, the
alternative with the highest IRR among the alternatives is the best option. The IRR test
results show that it is 31.12%. This suggests that ownership would generate a 31.12% return
on investment over time.
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Alternative Scenario # 2 : Electrical upgrade
Alternative Scenario 2
The alternative scenario will have an investment of 150 000 to the electrical upgrade. Out of
all the capital improvements that are possible for Broadacres Shopping Center, this is the
capital improvement that yields the highest benefit at 10%.
Test Results Matrix
Table 15: Test Results Matrix
The results for both As is scenario and the alternative scenario which are comparable are
shown above. Overall, the results for the “as is” scenario is the best option as the Cash on
Cash return of the “as is” scenario is higher at 14,18%; the Net Present Value for the “as is”
scenario is better at -1 431 384; and the Internal Rate of Return for the “as is” scenario is
better at 31,12. The owner’s required rate of return over the holding period of 5 years is 30%
and the Internal Rate of Return achievable on the “as is” scenario is 31,12%. The variable
that is better when comparing the “as is” scenario and the alternative scenario is the Value
enhancement. The value enhancement for the alternative scenario is higher at 78 787 257,
by 4 079 487.
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Part 6
Issues and Concerns
The purpose of this section is to respond to the as-is issues found in the client brief that are
challenges to
Competitive Position Of The Property
The property of Broadacres Centre is situated on the corner of Rivonia and Outspan roads,
for a long time has not been under the threat of any competition to its kind. The client has
mentioned that foot traffic has reduced because of the introduction of a new centre being
opened within the vicinity.
Just over 762,323m2 of retail developments in Gauteng was added in 2022 (StatisticsSA-2,
2023) and of which Johannesburg contributed 61838m 2 (Quantec; 2023)
This is a primary issue, as tenants who have less customers will discourage lease renewals
and might further cause rent reductions to appease the tenants or increase the vacancies in
the centre. The centre needs to distinguish itself from the competition.
With 3 vacant stores at, this is an opportunity to add a new mix of tenants to separate it from
the competition before considering new tenants after other leases expire.
Conditions of the Shopping Centre
Cooling/heating systems
There are various factors to consider when determining whether it is advantageous to either
replace or enhance an existing cooling tower. Such factors like: the condition of the existing
cooling tower, its efficiency potential, its age and the cost of replacement are to name a few.
Enhancing an existing cooling tower for more efficiency can be a cost-effective option should
the unit be considered in good condition and has the potential for improvement. However, if
the cooling tower is old, in poor condition, or has outdated technology, its efficiency
improvement may be limited, and a complete replacement could be a better long-term option.
The circumstances around the client’s requirements are such that the cooling tower is 10
years away from being decommissioned and with the 5-year holding period being desired replacing it with such a minimal budget is not ideal. It’s not been indicated that the system is
old and in poor condition so it is assumed that an upgrade of existing one would suffice.
Upgrades such as optimising water treatment systems, installing variable frequency drives
(VFDs), improving airflow design, and adding energy-efficient components can significantly
improve efficiency without requiring a replacement of a new tower.
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It should be noted that as the entire cooling tower and most probably the HVAC airflow
design are both not of recent technology, it is also a risk to replace the cooling tower in an
existing operating building. Hence adding energy reducing components are most suitable.
The SA Greenstar rating system of commercial buildings indicates two aspects or
components of cooling tower design that are awarded points for: the application of energy
efficient cooling tower fans and general energy efficiency of the cooling tower and its water
condenser pumping system (GBCSA;2020; pp12)
Install Variable Speed Drives: Use variable speed drives (VFDs) on fan motors to adjust the
fan speed according to cooling demand. This ensures that the fan operates at the optimal
speed, reducing energy consumption when there is less demand for its usage.
VFDs also make room to optimise water circulation by adjusting the flow rate of water in the
cooling tower to ensure it matches the actual cooling load requirements.
Lighting consumption
For the lighting – it is obvious that in this day and age, energy efficiency in regard to lighting
is the use of LED lights. As the centre uses fluorescent and incandescent light bulbs, this will
increase the energy consumption in the building. LEDs should be introduced.
Water consumption management
Water management has been a major challenge for Asset X at the Broad Acres Centre.
The main challenge has been the inability to track the use of water on the premises. A large
volume of water usage is not monitorable, despite the current metre systems form fire lines
and domestic lines.
The client has been advised to look at bulk metre systems for tracing causes of unknown
water consumption However the advantages and disadvantages need to be listed below to
determine it’s suitability:
Advantages:
● Bulk metres aggregate the consumption of multiple units or areas into a single metres
reducing the need to install and maintain several metres for each tenant
● By doing so the billing is simplified for the centre management
Disadvantages:
● By not providing individual metered points per tenant, it is hard to trace which is the
least-to-most consuming tenants in the centre. By not being able to capture this,
leaves the landlord with the issue they currently have with their current metre system.
● From a tenant securing aspect, the centre becomes unattractive for prospective
tenants when they recognise that there is central billing being used and not individual
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for their own water consumption. Tenants want to spend on what they consume and
not what is averaged out across the entire centre as that is not in proportion to what
they consume.
In summary, the centre is not going to have a bulk metre system. An Automated Meter
Reading (AMR) system can be used in order to trace specific points across the centre in
order to identify weak points causing large consumption across the building. Installing sub
metres per tenant is a more viable option for finding per tenant consumption and then
accordingly, the billing is according to tenant consumption (Better than the bulk method
above). There are several leak detection systems that can be invested into in order to report
unseen leakages in the centre in real-time.
Also, due to SA Green Star rating and LEED rating score points, tenants undergoing fit-out
prior to occupying new tenant space are encouraged to have a design that utilises watersaving plumbing fixtures. Sensor taps for example, are used to avoid the human error of
building occupants not closing taps (as an example of untraceable water consumption).
Sensor taps in public amenities are good sanitary investments for tenants to consider for this.
Lastly on the aspect of rainwater harvesting, the idea is very beneficial for marketing tenant
attraction as less consumption from water supply is advantageous. However it needs to be
acknowledged that there is an obvious issue with the roofing of the building regarding its
structural integrity. In addition to this, various equipment that needs to be situated on the
building roof may be a risk to its integrity especially with installing the catchment design of the
harvesting system.
In addition to that the client parameters revolve on a limited budget and the 5 year holding
period, rainwater harvesting comes with high capital costs – with provision of tanks, pumps
filtration systems (Unless it is only used for greywater and not consumption) and other
equipment. In addition to that. Fixing a new water system such as harvesting in a building
that is already 13 years of age, opens the necessity to do some demolition works for the
installation - in order to access existing water penetrations and re-routing them to the
rainwater harvesting. This seems like too much of an expenditure considering the objectives
of Asset X. In the case that the holding period might have increased to 10 years this may be
a different outcome however that is not the objective of Asset X.
Internet issue:
This is no question that it poses a concern to the marketability of the mall. Lack of good
internet detracts and reduces foot traffic of consumers if not provided. This is urgent and
should be budgeted for and immediately addressed. Tenants will also want this provision on
behalf of their customers.
Landscaping:
The issues regarding landscaping are of concern however not as much as
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Fire Life & Safety:
The client is advised to find compliance with sprinkler quantities and smoke detectors. It is
unsafe for the general public and therefore has to be implemented urgently. Capex should
address this urgently irrespective of it not being income producing.
Staff, Management and Operational procedures
There are a few challenges in this regard that will be discussed in isolation and then
afterwards attend to providing clients request for a “Job scoping & Role Definition” structure
that would allow for better management. This will coincide with what the limited Capital
budget addresses regarding improvements on utilities and therefore the requirement needed
from a management and staff perspective.
The first issue:
The operations manager lacks knowledge on HVAC systems and plumbing works.
The issue with incompetence in this aspect has affected the utility efficiency and recovery in
the retail centre, despite the good attitude and enthusiasm of the operations manager. The
impact of this is seen in the inefficiency of the cooling tower system, which seems not to be
energy efficient in the building (Accounting for 30% of monthly electrical expenses).
If the lack of skills that the Operations manager has is causing an efficiency issue, The client
(Asset X) is entitled to request to the Area Property Group on attending to the incompetent
Operations manager representing them.
Asset X should recommend that the operations manager receives training to improve his
competencies from the management company APG – taking into consideration he does
possess certain skills that are necessary to his role. On the basis that the systems are not
well maintained this should be an acceptable proposal to APG – at no further expense to
Asset X (Pty) Ltd.
Should APG be unwilling to allow for the Operations manager to receive training, Asset X
should cancel the services of the manager and also of APG.
The second issue:
Relating in a similar manner to the 1st issue, is the topic of the corrosion that has taken place
because of the lack of maintenance neglected by the operations manager. Considering the
urgency of this in maintaining correct plumbing for the retail centre is available – this is urgent
to attend to. However, like the first issue, there has to be a liability incurred on Area Property
Group due to the operations manager lacking knowledge on plumbing works maintenance.
Considering the limited budget of the Capex, maintenance charges are already accounted for
in the operating expenses of Asset X pro-formas. If the assumption is that this is a form of
insurance, this can cover for the damage as opposed to contributing funds from the Capital
improvements. It would be better if the claim for plumbing maintenance was lodged against
Area Property Group as a third party-claim. That way Asset X are not subject to increase
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insurance expenses (as an own damage/negligence claim would do) as if they had claimed
directly from their own insurer.
The Third issue:
Staff unrest in the centre is causing brand image to degrade. Although Asset X are not
responsible for the unruly employers, the negative impact it has is a contributor to the
detraction of consumers. CCTV is considered by the client is more viable also considering
that R15,000/month is being expended already for such a chaotic unrest. For the cleaning
component from Altra Solutions, a new company should be sourced for this specific service.
The client is practising nepotism and as such is also suffering the consequences of it.
The Fourth issue:
The centre manager being potentially lost over a new company is unfortunate at a time where
so much unrest in the retail centre requires individuals who are acquainted with the
challenges of the mall. Unfortunately increasing her income as a mechanism to keep her
interested in the running of the property as a centre manager is not going to increase income
with a 5 year holding period and a limited Capital Expense budget. The client is advised to
keep her until she no longer remains hopeful of seeing change in the community centre.
In addition to this, her habit of having a recurring 3-days absence is not ideal for the issues
experienced in the centre. It leads to the assistant manager having to step-in which is disliked
by Asset X.
The client is advised to use the time to run effective recruitment strategies for a new centre
manager who will be able to work fully during the week and also allows them to renegotiate a
better salary for a new hire. An assistant manager to the centre manager will also be
discarded as a result, leading to saving on costs for only 1 centre manager.
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Figure 4: Proposed new structure for Asset X (by authors)
Considering the reshuffling of tenants, The following structure in Figure 4 above is intended
to mitigate some of the issues currently faced by the centre and its current reporting line for
staff and management. Below are some descriptions of what the roles entail:
Centre Manager: This role oversees the overall retail centre’s operations, and also setting
strategic direction for its vision, and ensuring overall performance and profitability of the
entire centre. The centre manager should report to the Asset manager so as to create the link
between the Asset as an investment to Asset X REIT and supporting managers assisting in
the wellbeing of the centre. Aside from the rent collection duty which is suggested to be
overseen by the leasing manager, the rest of the finances in the centre such as Annual
budgeting, financial analysis and forecasting for the asset manager is necessary.
Operations Manager: This position manages the day-to-day operations of the retail centre,
which includes facility management, maintenance, security surveillance, and customer
service and relations. The role of the existing operation manager should remain however with
added ability should have been trained as advised to the client. He knows the issues facing
the centre with the previous structure.
Leasing Manager: This role is responsible for negotiating and managing lease agreements
with tenants, handling tenant issues, and facilitating leasing activities to ensure maximum
occupancy. The introduction of this addresses the challenge of the centre's competitive
position considering that its success is under threat from a new centre stealing foot traffic.
This role will assist the Centre management with the leasing structures of the tenants but also
will assist in tracking the finance performance from rent collection to assist centre
management.
Marketing Manager: This position focuses on promoting the retail centre, coordinating
advertising campaigns, organising events, and implementing marketing strategies to drive
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foot traffic and boost sales. The importance of this role cannot be overlooked. The marketing
manager will
In summary the division of the REIT of Asset X separating the physical management of the
company by outsourcing centre management in itself is effective however following the
proposals that have been found in the market analysis and also to be elaborated in the
alternative cost improvements to follow explains the structure above. The previous structure
had too much responsibility on the centre manager and the operations manager. With the
intention to revive the mall with new tenant mixes and to create interaction with a new market,
leasing management and marketing should be there to increase foot traffic but also to assess
the performance of tenants who might be a liability to the profitability of the property.
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Part 7
Alternative Capital Improvements
Summary of the Alternative improvements
There has been an extensive evaluation of the options provided for capital improvements and
the various options have been ranked according to their financial benefit as well as their
importance from a legal point of view. All tables and calculations are provided in the sheet
titled “Broadacres Calculation Notes”.
Table 16: Issues Ranked for Capital Improvement
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Table 17: Implication of Alternative Improvements
The following paragraphs will be a brief discussion of the reasons behind the ranking of the
different capital improvements. Some are rated as more important than others according to the
following criteria: (1) Financial improvement afforded to the centre as a whole (2) improvement
of the centre’s risk and legal liability standpoint.
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The Capital Improvements highlighted in the below Table 18 are the improvements which were
chosen according to the above criteria. All improvements fall within the budget provided at
R320,000.00.
Table 18: Improvements fitted into Budget
There are three categories which the potential capital improvements fall into:
1) Decreasing Expenses
2) Increasing GPI
3) Improving the Centre’s risk and legal liability standpoint
Decreasing Expenses
Electricity Upgrade
It was calculated that over the 5 year holding period, the centre would save R382,789.00 in
electricity costs (with a 10% decrease assumed across both utility expenses and maintenance
expenses because an upgraded system would not only be more efficient but also would require
less maintenance). The Net income would be R232,789.00 after deducting the initial cost. This
capital improvement is ranked in the “Least Improvement” category because it generates
relatively small income compared to the improvements which affect GPI, and it is not a legal
risk at this stage.
Plumbing Upgrade
Over the 5 year holding period, as per the above Table 17 titled “Plumbing Upgrade Income”,
the upgrade is calculated to save R163,292.00. (with a 2% decrease assumed across both
utility expenses and maintenance expenses because an upgraded system would not only be
more efficient but also would require less maintenance). This capital improvement is ranked
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in the “Least Improvement” category because it generates relatively small income compared
to the improvements which affect GPI, and it is not a legal risk at this stage.
Increasing GPI
The capital improvements which affect GPI have been analysed by comparing the As-Is GPI
growth to the Alternative GPI growth after the capital improvements have been implemented.
The total income produced by the improvement is calculated by minusing the As-is GPI
growth for the year from the Alternative GPI Growth. It is noted that the Capital Improvements
which increase the GPI have the largest effect on the centre’s income as a whole, and
therefore have been chosen with priority.
Marketing Campaign
Table 19: GPI increase - Marketing
It can be seen above that the marketing campaign resulted in an extra GPI Growth of
R6,201,414.00 over the 5 years. The net income is R6,121,414.00. Note that the growth in
the alternative GPI is recorded at 13% in the year of implementation (10% + 3%) and the
following years reverted back to the prescribed 10% annual growth.
Facade Upgrade
Table 20: GPI increase - Facade Upgrade
It can be seen above that the facade upgrade resulted in an extra GPI Growth of
R3,100,707.00 over the 5 years. The net income is R3,030,707.00. Note that the growth in
33 | Page
the alternative GPI is recorded at 11.5% in the year of implementation (10% + 1.5%) and the
following years reverted back to the prescribed 10% annual growth.
Technological Upgrade
Table 21: GPI increase - Technological Upgrade
It can be seen above that the facade upgrade resulted in an extra GPI Growth of
R6,201,414.06 over the 5 years. The net income is R6,101,404.00. Note that the growth in
the alternative GPI is recorded at 13% in the year of implementation (10% + 3%) and the
following years reverted back to the prescribed 10% annual growth. The internet upgrade is
particularly important as the current tenants have previously complained about the issue to
centre management.
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Part 8
Summary & Recommendations
To summarise the proposal of a management plan of KRDC Properties in the interest of
Asset X (Pty) Ltd, the conclusion of recommendations are to be seen from both a quantitative
and qualitative perspective. The recommendation by KRDC Properties intends to find the
alignment between both quantitative and qualitative aspects in order to create a successful
plan for the property of Broad Acres shopping centre.
The qualitative aspect responds to the client's concern on customer attraction with a concern
on the decline of customers in the centre due to competition in the area. KDRC Properties,
has identified gaps in the consumer market relating to goods in demand as indicated by
trends in the CPI from stats SA indicating basket price inclines in food, beverages (both
alcoholic and non-alcoholic) and tobacco. Considering the general market decrease in
disposable income to interest rates the vacant tenants should ensure that they offer stability
to the centre and also to offer a competitive edge as well. As the CPI is used as an indicator
of successful retail goods, food and beverages in the form of unique restaurant brands seems
very viable. When using the precedent of Rosebank mall food court and in general the dining
experience offered in the larger Sandton, the centre could be revived with tenant additions of
such a nature. It is important for a bespoke brand to be incorporated as fast foods don’t offer
the unique experience that has made suburban dining so special. Also, with the limited
budget the client is also advised to relook weaker tenants such as Chicken Licken and Studio
88 for more appropriate use of tenant space and look for stores that offer more convenience
as most of the store offers - considering the residential catchment in the area.
The quantitative aspects brief from the client included very specific instruction on the Capital
budget of R350 000, a thorough process was involved showing the difference in the budget
used without consideration of addressing issues of the client, and then again indicating those
consideration of issues raised. Having shown the capital return on improvements made it was
identified that Marketing, Facade & Technological upgrades would yield the most return on
the asset. On the operational side of the development the water feature upgrades and smoke
and sprinkler renovations were fitted into the Capital budget on the basis of safety,
compliance and also the recoveries made on these. From the perspective of attracting and
retaining key tenants the utility aspects of water and electricity have also been invested into
so that tenants have less expense on rental to pay by saving on such resources.
With the facade and landscaping upgrades, the centre will also have an aesthetic revamp
and in doing so will stimulate custom attraction to the place again. Lastly, in holding together
the wellbeing and maintenance of the centre, during improvements and for the remainder of
the holding period, the management structure of the centre as proposed will allow for a good
balance of responsibility on various tasks on more managers than before. With the proposal
of tenant acquisition and capital improvements for marketing campaigns, the introduction of a
tenant and marketing manager respectively will assist Asset X in the relevant selection of
tenants and the marketing campaigns that the centre will host.
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