From the busy N1 between Johannesburg and Pretoria, the Waterfall development looks like nothing more than a string of cranes perched on the horizon and towering over mounds of dirt.
But a swift left off the highway and on to Allandale Road reveals the start of a whole new city.
At a time when the national economy is teetering on the brink of a recession, this pocket of land in the centre of Gauteng is home to the largest mixed-use property development South Africa has ever seen – and is worth R16-billion.
The project has an unusual ownership structure – an Islamic trust, which operates on a not-for-profit basis and distributes surpluses to social projects, including primary schooling for 100 000 children as well as a feeding scheme.
The Waterfall development encompasses 2 200 hectares of land. It’s larger than Sandton and stretches from Woodmead to Kyalami and Vorna Valley, bordered in part by the suburbs of Buccleuch and Sunninghill. It covers both sides of the N1 with the larger part on the western side and encompasses landmarks such as the Vodacom World of Golf and the Nizamiye Mosque in Midrand.
In the city is a mix of large-scale retail, commercial and residential developments, complemented by schools and crèches, hospitals and a world-class fibre-optic network. Also planned are a training college and a helicopter airport.
The residential area is partially developed and will, on completion, have up to 18 500 units. House prices range from about R600 000 in one affordable housing development to a property valued at R160-million at the Waterfall equestrian estate.
The 1.88-million square metres of planned commercial developments range from industrial parks to the headquarters of big pharmaceutical companies, including Novartis. Nearby, the Mall of Africa, the continent’s largest shopping centre built in one go, will open for business in six weeks.
The PwC tower in progress.
Alongside it, construction continues on the 26-floor head office tower for PwC, one of the global big-four auditing firms, which will be the first high-rise to make its mark on the Waterfall city skyline.
Although just 35% of the development is complete, already R1.5-billion has been invested out of pocket by the developers for bulk infrastructure – roads, sewerage works, electricity and water.
These assets have been transferred to the Johannesburg City Council but are in many cases maintained by the Waterfall Investment Company and its partners. There are hopes for a Gautrain station, with land already set aside for it.
An economic study conducted by Dirk Nico Prinsloo, from the property research company Urban Studies, dated February this year, estimates the total economic spin-off of developing Waterfall City at nearly R90-billion. And the indirect estimate of the ripple effect on the economy is pegged at R134.2-billion.
On completion, anticipated by 2025, the development is expected to create 86 000 jobs and will contributed almost R1-billion in property taxes each year. This, Prinsloo estimated, will represent between 6% and 7% of the City of Johannesburg’s total property tax income.
Asset valuations have grown rapidly in a few short years, and more than doubled in some cases. The affordable housing development, Waterfall View, which has 717 units, has seen properties that sold for between R650 000 and R830 000 in 2011 now realise values of R1.1-million.
The giant Mall of Africa, the largest shopping centre built in one phase in Africa.
The first title-deed-holders of the Waterval farm were the Gibson brothers, who arrived from England in South Africa in 1871. They bred cattle and operated their Red Star Line stagecoach business between Johannesburg and Pretoria.
In 1934, the farm was sold to Moosa Ismail Mia, a trader who built a religious training facility and a school for Indian and black orphans. He registered the development in the name of Witwatersrand Estates Limited (informally known as Mia’s Farm), which to this day is owned and controlled by the Waterval Islamic Institute.
The institute keeps a low profile but it is known to have run one of the first Islamic boarding schools in the country – today it educates 100 000 children and runs a feeding scheme. It has also printed Islamic books, which are distributed worldwide.
The original farm was even larger than the present 2 200 hectares but the apartheid government expropriated parts of the farm for the development of Eskom’s Megawatt Park and the Buccleuch interchange.
To date, the large tract has not been developed despite its prime location – passed by 12 000 cars each hour – because of one significant fact: it can never be sold. As a religious endowment, known as a waqf, only leasehold agreements can, and do, exist here. (See below.)
Werner van Rhyn, a director of the Waterfall Investment Company, envisioned the development of the land as far back as 1997.
The non-transferable nature of the waqf would usually be widely viewed as a problem for development, but he saw it as an opportunity. Other directors of the investment company include Ibrahim and Yahya Mia.
The company is a development vehicle for the landowner and has partnered with developers, such as the Atterbury Property Group and Century Property Developments to realise Waterfall.
“We are building a city,” said Van Rhyn. Location, he said, was the biggest factor in determining the development’s success. “Tshwane and Johannesburg are merging towards one another, and Waterfall is situated in an excellent location at the intersection of some of the busiest roads in South Africa.”
Although location was important, Van Rhyn said a dynamic urban design framework worked well for a mixed-use integration development. Including a component of social housing was important for the development if it aspired to become an integrated city, Van Rhyn said. Some high-density housing is planned and units are expected to start at R350 000 or less.
The long journey to unlock value on leasehold land
Unlocking the potential of Mia’s Farm was no minor feat. Key to it was to achieve a leasehold agreement that would work as closely with ownership as possible to get the banks on board.
Discussions with the financiers took nine years before they would agree to finance residential properties at Waterfall under a leasehold agreement, according to John Webber, the director of the real estate practice at the law firm Cliffe Dekker Hofmeyr (CDH). “In 2001, we started talking to retail banks. For a long time there was a lack of appetite. They wanted to know: Will the economies of scale be there to justify new banking product? Can we securitise [pool it with other mortgages to sell on to investors] it in future?”
At first, the reluctance to finance it did not stop people from buying the right to lease land at Waterfall and building on it.
“The initial developments were on the high end. With that, there were more cash buyers and the banks weren’t that involved,” Web-ber said. The two retirement estates in particular attracted cash buyers as retirees would sell up existing assets to purchase a house there. Where there was bank financing, it was typically for private clients where the amount in question wasn’t a significant part of the particular borrower’s portfolio.
But when Waterfall’s focus moved to somewhat lower-value housing, of between R3-million and R4-million, and the affordable housing market, the banks’ willingness to finance it became paramount.
The interaction with the banks resulted in more than 100 drafts before finalising the leasehold agreement as it stands today.
“But the result is we have come to a document which is really as close to being the owner as you can get without being the owner,” Webber said.
The leasehold agreement on residential properties is for 99 years, and the contract gives the lessor the first option to renew the contract in perpetuity.
Unlike a standard lease agreement, the 99-year lease agreements at Waterfall are registered in the deeds office.
“Ninety-nine years ago was just after the Anglo-Boer war,” said Werner van Rhyn, a director at Waterfall Investment Company. “It sounds like a short period but it’s a long period of time.”
All banks that provide mortgage financing are now involved in the financing of properties in Waterfall city, he said.
“Before this, there were very few leasehold transactions where banks regarded the leases to be bankable,” said Webber. “They would usually invest in the landowner over the property.”
The model pioneered by Waterfall, Van Rhyn believes, is an excellent one to use to open up large tracts of land, such as in the former homelands, which remain under traditional ownership. “It’s a very good model for authorities to create a long-term sustainable income base.”
That is, if it is properly implemented, which requires a strong commercial incentive and enlisting the help of one of the bigger and stronger law firms, he said.
Webber said that a large-scale development was vital for the model to work elsewhere. “You need a large-scale landowner and 1 000 units or more, otherwise it just doesn’t make sense to have the computer system that maintains it, or to have the site manager that inspects everything, or the guy checking up on the rates and taxes payment,” he said. “Economies of scale are necessary.”
Webber and CDH are working with three different clients to try to get this model to work on tribal land where the state is the owner. Title deeds have, until now, not been possible, and so neither has financing or the development that comes with it.
“This system will allow for it to work there,” Webber said. “The only thing is we have to replace the state with a propco [property company] of some sort.”
It would be administratively impossible to have the state as the landowner because it would require the minister of the relevant department to sign every lease personally.
“The challenge is to get a material buy-in from government to a propco. The propco would not be allowed to sell it and may only make it available by way of lease, and by doing so in terms of these standard conditions,” Webber said.
“So we haven’t got there yet … It requires a change in ownership.” First, it requires a change in the rural land release policy.
Old solution to a modern problem
Nontransferable land such as Waterfall farm is a religious endowment known in Islamic law as a waqf. The land belongs to Allah and cannot be sold, and the produce or profits from it must be used for charitable purposes or for the public good.
The oldest dated waqf deed goes back to the ninth century. The Ottomans had vast tracts of land that had been converted to waqfs. Proceeds from them were used to develop infrastructure and provide services where the empire couldn’t.
More recently, the proceeds from waqfs have helped to develop infrastructure in Muslim nations such as Afghanistan and Kuwait. Even African nations Ethiopia and Burundi have benefited from grants for education and health projects from the Islamic Development Bank’s Waqf Fund.
The waqf was identified by the G20 think-tank, the T20, last year as one possible way to unlock infrastructure investment.
Leases ‘are A-grade stuff’
The lease for a Waterfall residence provides security of tenure to end-users, is a bondable asset and is transferable to a third party.
“We have created a system where the lease operates as if it were a title deed,” said Cliffe Dekker Hofmeyr’s John Webber.
The sale of the Waterfall land is restricted, but the holder of the right to lease becomes the notional purchaser. Should the right to lease be sold on (with the build house), on transfer of the leasing rights, the new lessor’s right to the lease will be automatically extended for another 99 years. There are no transfer duties on the properties, but there is an amount of 3.5% of the property’s market value that is payable to the landowners by the seller when the rights to lease are sold on.
But the fees are 10% and 12% for the two Waterfall retirement developments, Webber said.
The residential lease cannot be cancelled, said Webber. The only exception is if the lessor contravenes the conditions of the religious endowment, known as a waqf, which do not allow anyone to conduct, as a primary business, the sale of pork or alcohol, gambling or prostitution, on the property.
If a lessee is in breach of the conditions, there will be an opportunity for the lessee to remedy the matter. A legal process must follow before the lease can be cancelled.
As with freehold, the Waterfall lease requires leaseholders to be responsible for their own rates and taxes. Failure to pay rates and taxes, or the homeowners’ association, will trigger the start of the cancellation process if R10 000 or more is outstanding.
This acts as an early warning system for the banks, which are notified when any step taken to cancel a lease occurs.
“I personally think the banks should be discounting the lending rate on these properties. Because of all the advanced warning systems put in there, there is less risk there,” said Webber. “If I were banker, I would ring-fence it and say this is A-grade stuff.”
Should the lease be cancelled, the landlords will find a new buyer for the rights to lease. The proceeds from the sale will settle the home loan amount and outstanding levies and taxes. In distressed situations, the 3.5% fee may be reduced.
Market valuation is another challenge the residential developments faced. For this reason, Waterfall has its own system or information portal to record purchasing information.
Estate agents who wish to operate in Waterfall city must be accredited by the landowners and are supplied with the lease document.
Commercial property lease agreements in Waterfall City vary from 12 to 99 years and are less problematic because financing is based on a business’s books and not the property.
In the case of retail developments, such as the Mall of Africa, the landowners are due a percentage of the rent collections each month.
Praven Subbramoney, the chief executive of private bank lending at FNB, said FNB and RMB Private Bank were initially cautious in their approach to funding these nontraditional methods of sale, but have since found comfort of financing such mortgages.
Callie Ueckerman, manager of strategic stakeholder engagement at Absa Home Loans, said the lending on the 99-year lease product is exactly the same as with traditional lending and that normal mortgage lending criteria applies.