Long before BEE, an altruistic businessman was working tirelessly to improve the lot of rural black South Africans, as Alan Swaby discovers.
Business men and women like to make money. Make enough of it and they sometimes turn philanthropic, contributing some of their wealth back to the community. But making money while being philanthropic results in a whole new level of personal satisfaction.
In 1983, South Africa was a dark and violent place, with black and white communities far removed from one another, thanks to the iron grip of apartheid. And with the government’s principles of separate development being applied unfairly and inequitably, apartheid meant that in South Africa, white people had, and black people had not.
At the time, John McCormick was working for a furniture retailer with a chain of stores servicing the ‘secondary market’—in other words the poor, black end of the market. Being so close to the point of purchase, he saw first-hand the lack of decent shopping facilities available for black South Africans within the areas demarcated for them to live—often far outside the ‘white’ urban centres. Rural areas, in particular, were badly served with bus journeys of as much as 75 kilometres being necessary in order to buy anything more than just daily food requirements.
Seeing how much effort, time and expense they had to invest in order to make retail purchases that white buyers never even gave a second thought to, McCormick decided to put his MBA training into giving the black community better facilities. Little did he realise the enmity this would create amongst both communities. “My father was accused of being a kaffir boetie [a racial slur] by the whites,” says Jason McCormick, current managing director of McCormick Property Development (MPD), “and was just as mistrusted by the blacks. He once had a gun put to his head and was told get out of town or face ‘African Justice’ by a local trader who did not understand his community-based development principles.”
The white business community turned their backs on McCormick—partly through a general aversion to the socio-political repercussions from doing business with blacks but also due to a large measure of risk aversion, considering that the danger of lending money to put into black townships as too great. At the time, violence and friction were rife and the possibility of buildings being torched extremely high. Insurance was expensive, even if it could be bought at all.
McCormick cut his development teeth on a few small projects for his previous retailing employer and then managed to persuade First National Bank to lend R1 million unsecured which financed his first real foray into black rural shopping centres. The trust given by the bank has since been repaid many times over—MPD has to this day over 147 accounts open with First National.
“We hit upon a development model that hasn’t changed very much in 25 years,” says McCormick. “At the time, all the land occupied by black areas was owned by the government. Blacks could only get a permit to occupy, never own. My father had to find a black partner who would secure the land on which he could then build. Therefore, getting the local black tribal community involved in our projects and giving them a stake in their future was our mantra long before BEE [black economic empowerment].”
But to make these projects work, sound business principles need to be applied. As such, 85 per cent plus of space is rented to national retailers but there is always space for local traders, even if they are only 50 square metres in size. In rural areas, it’s impossible to get anything like urban rents but the building still needs to be constructed to a world-class standard. “In many respects, this has been our differentiating factor—creating top-quality structures in areas where often the lowest quality would have been deemed acceptable. Certainly, in the early days especially, the ratio between gross building space and gross rentable space is kept high—often not much short of the full 100 per cent, in order for us to afford the quality of the build at the lower rentals achievable,” notes McCormick.
With the fall of the apartheid government in 1994, the climate changed somewhat and it was possible to switch the emphasis from pure rural to peri-urban township developments. As each year passes and the level of affluence amongst the black community increases, there is also a gradual switch from utilitarian to more aspirational developments. “Black people have seen the quality of shopping malls that were built for white communities,” says McCormick, “and they want the same level of sophistication. We have adopted our design policy to satisfy these aspirations and I’m proud to say that the shopping malls we are building in black areas now are every bit as attractive as anything found elsewhere.”
Over the years, McCormick has noticed how the completion of a shopping mall within an under-developed area shifts the balance of economic power geographically. As such, offices and apartments are becoming part of the mix. In the latest project—Mall of Mozambique in Mozambique’s capital Maputo (which at over 65,000 square metres GBA is the largest mall in that country)—MPD is not only building commercial and regional government offices as part of the project but negotiating with a private hospital in Nelspruit to open the country’s largest private hospital.
Edendale Mall, the other big project opening later this year, features an underground minibus taxi station large enough for up to 300 buses which will deliver customers to the 110 shops in the mall.
To date, MPD has built 48 shopping centres, with two (including Edendale) on track for opening this year. Over a third of these are still owned and managed by the company with over 36,000 direct jobs created within these malls in the process.
The company having had its genesis within these politically tumultuous areas, in the mid-1990s John McCormick decided that branching its development portfolio out into the African market was a logical extension of its development model—a model that had at that time already proven itself extensively within the South African ‘African’ market.
Ironically, John initially targeted a development in Matola (on a site only 1,500 metres from the current Mall of Mozambique site) as well as in a number of East African countries in the early to mid 1990s. However, none of those initially-planned African developments took flight, as he was too early. “Africa was not ready for this level of development at that time,” he notes, although he remains optimistic of the importance of the lessons learned in the early days. “As they say, ‘Your first loss is your best loss,’” quips John, who as chief executive remains as intimately involved in the company’s current push-up into Africa as he was in the 1990s. “Although I left huge money up in Africa in the 1990s, those ‘school fees’ have proved invaluable in our forging the partnerships and securing the prime sites that we have now secured for developments across the continent.”
Admittedly, the one lesson learned in the early days was that while in South Africa one can do deals on a ‘handshake’ basis, this methodology does not carry the same weight on the rest of the continent. With this as a founding strategy in the company’s current push-up into the African continent (the real ‘Dark Continent’ as McCormick puts it),the group has to date secured seven significant land deals in Africa, in countries as diverse as Rwanda, Burundi, the Democratic Republic of Congo (DRC), Zimbabwe and of course, Mozambique.
“Our strategy across Africa has been one of a ‘hub and spoke’ scenario,” notes McCormick, “with us securing the prime retail/mixed-use development sites within the capital or major economic hub of a country, and then securing access to secondary towns within the region. We initially picked towns that not only have large commercial and retail opportunities but that are also more accessible by supply routes and potential tenants’ existing logistical routes and supply chains.”
But physically getting goods into many of these countries can be challenging. As such, in many MPD developments, the company is developing ancillary distribution centres with their own dedicated customs-clearing houses. “This facilitates a greatly simplified solution to stocking the shelves for our tenants, ensuring the provision of the latest products in our malls—something that we believe will remain a huge competitive advantage as future developments try to come against us. One can only capitalise on ‘first mover advantage’ for so long, and then we have to adapt to the movements in the market. We have planned for multiple phases of expansions in all our developments in Africa: it is managing every element of every stage of the mall’s development and delivery that will ensure its relevance going forward into the decades to follow.”
However, while MPD is very much focused on the expansion of its African development division, it remains fully committed to its existing and future South African developments, ensuring that it delivers these on time. “These developments remain our bread and butter and we have an extremely strong pipeline of exciting projects that we are concentrating on,” confirms McCormick.
The Modjadji Plaza opened in May, Edendale Mall, (32,000 square metres GLA in Pietermaritzburg) is opening at the end of this month, and Atteridge Plaza (5,000 square metres GLA in Pretoria) is opening in November, to cap another successful year of development for the company. Meanwhile, work has commenced on Diepkloof Square (15,500 square metres GLA in Soweto, Gauteng); Olievenhout Plaza (16,500 square metres GLA in Centurion, Gauteng); Ezakheni Plaza (14,056 square metres GLA in Ladysmith, KwaZulu Natal); Blouberg Plaza (12,500 square metres GLA in Bochum, Limpopo); and Phase 1 of Lusiki Plaza (14,500 square metres GLA in Lusikisiki, Eastern Cape). The South African development division is therefore currently constructing over 110,000 square metres GLA of retail space within South Africa—no mean feat within the currently ‘depressed’ economic environment!
The company has grown from its humble roots into a company with a portfolio of over R4.4 billion worth of property under ownership and management, and about R15 billion worth of projects in the immediate pipeline.Remarkably, all of this has been achieved with a head office staff of just 30! “We outsource everything,” explains McCormick. “At any one time we might have 20 architects working on projects and another 20 engineers making them work. Then we fragment the construction as much as possible, getting the best possible bid for every single aspect of the build. We might only shave points off the cost but it all goes on the bottom line.”
And these days the bottom line looks very healthy: MPD has banks queuing up to lend money. The business strategy is to have as much leveraged debt as possible but rather than being worried about becoming over-extended, McCormick is relaxed about matters. “Tight control over costs and an emphasis on national tenants means that we generate 14 or 15 per cent ROI [return on capitalised investment] while we are borrowing at nine per cent. Our debt coverage ratios are such that the net cash inflows, after interest and taxation, are strong, allowing us to remain cash positive in year one. This allows us to sleep at night, while developing in areas that (developed nation-minded) angels fear to tread!”
In other words, philanthropic capitalism that really works. http://www.mccormick-property.com
