The Colony was acquired in 2009 shortly after the financial crisis hit in October 2008, with the culmination of the bankruptcy of Leman Brothers. It was a difficult time to put a deal together due to the uncertainty in the world economy and the SA banks were not in the mood for lending.
We had initially negotiated a price of R38,2m for the two properties, the Standard Bank building being a separate erf to the Colony property. We had raised R20m in equity from Investors to do the deal and were looking to borrow R25m to cover the acquisition cost as well as a R6m revamp to turn the centre around. The banks refused us. We then raised a further R5m from investors and went back to the banks asking for R20m this time. We were again refused.
We then approached the seller to see if they would sell just the Colony property to us at R22,5m and having already raised R25m we then bought The Colony for cash. We then managed to convince Investec to lend us R6m to do the revamp. To put this into perspective, this was half the value of what the vacant land was worth at the time, testament to just how risk adverse the banks were at that point.
When we took transfer in November 2009 The Colony had a 30% vacancy. Milady’s, CNA and House of Coffees and most of the upstairs office tenants had vacated the property. We set about rebranding the centre and significantly changed the look of the property. Once The Colony was fully let we were approached by the Seller to relook at the Standard Bank building. We offered R2,8m less than we previously offered since the lease with Standard Bank was up for renewal and they had made it clear they wanted to move.
With the Colony now working fairly well the banks offered to lend us R20m we originally wanted, which then enabled us to acquire the Standard Bank property. Shortly after that we finalised a 3 year renewal with Standard Bank, and have since had ongoing contract renewal.
It has however, not been all smooth sailing. Hillcrest is a highly competitive retail market and the operator of Food Lovers Market was not performing to our expectation. This led to a general mediocre performance of the centre as a whole and it was something we have had to address. Despite having a lease in place, the operator could not be motivated to increase performance and uphold the brand reputation we were aiming for. We then lost Clicks to Lilies Quarter down the road as they could not get a pharmacy licence for our site, and our coffee shop, Freshly Ground, did not perform under 2 separate owners due to owner/operator inexperience. The tenant mix was generally not working and some of the smaller tenants were not adding the kind of value we were looking for.
When the coffee shop came up for sale for the second time we made the decision to buy the Coffee Shop ourselves, and searched for the right operator which we found in Stretta Café. They have been fundamental in helping us rebrand the centre, and Stretta Café has exceeded all of our expectations. When Oxford opened down the road, it really exposed our Food Lovers Market operator and provided the catalyst for action. We have since negotiated a new corporate lease with their head office, and the new management is already showing a considerable improvement in the store.
We recently signed up Chateau Gateaux, who got off to a successful start on Mother’s Day. We are in the process of signing up Afro’s, an upmarket grilled Chicken franchise, and Lineage Coffee Roastery. We did not renew the Dry Cleaners lease and have decided to relocated Health Nuts. Hillcrest Liquors has been acquired by Market Liquors under a new 5 years corporate lease, all of which will add value to our tenant mix.
We are also undertaking a R1,5m façade upgrade on Old Main Road which will further enhance our asset’s appeal and will help improve the brand perception of the Colony in this highly competitive market.
Despite the challenges we recently had the property valued at R65m by an independent value and we have achieved a 93% ROE at this price in 4 and half years (20% pa) excluding income returns most of which have been reinvested in the asset. One of the shareholders who held 16% has exited the investment and the other shareholders have all grown their share percentages. With gearing currently at R15,474,000 (24% loan to value) we now have considerable leverage in the property to re-gear and or grow our investment further.
We are currently busy with a rezoning and a consolidation of the two properties. The rezoning has been approved giving us an additional 5,000m2 of bulk to develop. Once the consolidation is formally registered we will be submitting plans to add an additional 1,000m2 of retail space. The additions will involve adding a semi basement parking to the Standard Bank property, and then joining the two properties together by linking them with shops and covered walkways. We then intended to rebrand both properties as The Colony Shopping Centre.
Once the re-tenanting exercise is completed, the Façade upgrade to Old Main Road and the 1,000m2 has been added we will then be reaching our full potential with this investment. Once this is completed we believe there is also additional value to unlock as we are currently under let compared to the other retail offerings in Hillcrest.
As the Colony was our first turnaround retail investment it has given us some wonderful insight and experience into what is required to get an ailing centre to turn the corner. Retail property investments require considerably more effort than office or industrial assets, however they give you the opportunity, if you do the right things, to enhance your return significantly.