Chinese Plan Financial Hub, Without The Finances
BMI View: In light of the relatively glum economic outlook in South Africa, we question the financial viability of a US$7.8bn Chinese development aimed at creating a new financial and business hub in Johannesburg. Although the project is in line with government objectives and could act as a new Asian business hub on the continent, the liquidity of domestic financing is moderating and South Africa remains vulnerable to capital outflows in light of US tapering of quantitative easing. As the developers are reliant on additional parties investing in the project, we are sceptical on its realisation - at least over the short to medium-term.
In a move which could herald a new wave of Chinese investment in Africa, Hong Kong-based developer Shanghai Zendai Property Limited is planning to transform a Johannesburg suburb into a global financial hub. The firm said it will spend about US$7.8bn on the development over the next 15 years. It will have seven focus sectors: finance and trade; an industrial zone for light industry such as warehousing and manufacturing; a convention centre; an African heritage theme park; facilities for education, training, sports and recreation; and up to 35 000 houses.
Showing an early commitment to the project, Shanghai Zendai has recently signed an agreement with AECI Limited of South Africa to acquire the site of the proposed development in Modderfontein, a manufacturing district in eastern Johannesburg. The land which was paid for in cash, which is located between the existing financial centre of Sandton and O. R. Tambo International Airport, sold for ZAR1bn (US$104.6mn). A particular appealing factor for the project is the recently opened Gautrain station in the locality. Shanghai Zendai will work with other developers while investing its own money in the project. As the property is largely undeveloped, roads, electricity and other infrastructure will still need to be added.
The development of residential, commercial and financial property is relatively new, especially on this scale, for Chinese companies in Africa - a fact which reinforces the idea that South Africa remains the gateway to access the rest of the continent. Over the past decade, state-owned and private Chinese firms have been building African roads, railways, ports and other infrastructure in exchange for access to minerals and oil (see ' China Paved The Way, The Rest Of Asia To Follow', September 3). However, after criticism against this method of investing on the continent has risen and Africa's infrastructure deficit is slowly remedied, we expect more Chinese interest in property development, just as we have seen from European investors (see ' Middle Classes Spark Commercial Property Interest', June 18). The project could also serve as a base for Chinese forms looking to establish a base in Africa, similar to the development of the Royal Albert Docks in London as an Asian business hub, which already has attracted at least 57 businesses ready to move in once the project is completed.
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We expect that the South African government will be supportive of this project, on account of the employment, housing and economic benefits which will likely emerge as a result of its realisation. Indeed, the National Development Plan states that the growth of cities and special economic zones is imperative to South Africa's future. Additionally, the government's pledge to have eradicated the country's housing deficit by 2030 will be boosted. Whilst it is low-cost housing which the government is targeting specifically, which the Zendai development will not be, the company states that 70% of housing in the complex will be reserved for black middle-class families, which might sit well with some within the ruling ANC party.
It is then financing which will be the stumbling block for this major development. As alluded to above, the sheer size of the project makes it impossible for Zendai, which currently has a market cap of just US$295.5mn, to fund by itself. In terms of domestic financing, we expect loan and asset growth in the banking sector to continue to moderate, due to the weakening consumer sector and faltering business confidence. We forecast that real GDP growth will be just 2.5% in 2014, barely an improvement on the anticipated 2.1% growth rate in 2013, owing to various factors including slowing growth in China and retrenchment in the gold mining industry. Neither of these factors lends themselves to raising the kind of capital necessary to build the project, nor for the profits of companies who will drive demand for the new property. Last but not least, South Africa's political risk profile is unfavourable, adding to investor concerns. Industrial action has diminished recently, but will likely flare up again given the high degree of unionisation.
International financing also looks dangerously out of reach for the project. South Africa is widely regarded as one of the more vulnerable emerging markets that will suffer 'when the tide goes out'. In other words, if global investor appetite for emerging market assets dries up following an inevitable rise in US treasury yields, portfolio inflows may be insufficient to fund such a project. As such, we believe that over the medium-term, until South Africa's broader economic position improves, the appetite for this project will be limited.