15 on Orange: Once regarded as a no-hoper. Picture: Hetty Zantman
15 on Orange: Once regarded as a no-hoper. Picture: Hetty Zantman

Western Cape-focused real estate investment company Spear is confident that its investment in the controversial 15 on Orange hotel development, on the fringes of the Cape Town city centre, will pay off handsomely.

Readers may remember that 15 on Orange (or 15 on Lemon, as some sour shareholders dubbed the property) enjoyed, or endured, a fairly brief sojourn on the JSE as the sole asset of the Quantum Property Group (QPG).

As documented in an FM cover story in September 2011, QPG invested around R400m in 15 on Orange as a part of a development that ending up costing close to R800m.

The upmarket hotel got off to a slow start (after opening late) in 2010, and simply never generated the cash flows to service its debt. QPG was suspended on the JSE after banker Absa pushed for liquidation, and its shareholders lost their shirts.

At that time the hotel was regarded as a no-hoper, and unlikely to realise much value in wind-up procedures.

But in 2013 Blend Property Group emerged as the new owner of the hotel, though the price tag of its buy-in was never disclosed. In mid-2017 newly formed Spear, which had the DoubleTree by Hilton Hotel Cape Town Upper Eastside in Woodstock as its only leisure asset, bought 15 on Orange for R298m from Blend.

Spear CEO Quintin Rossi says another R45m has been spent on refurbishment, mainly to enhance appeal to the leisure market and to improve the conferencing and retail segments. He says the further capital expenditure will push Spear’s full investment in 15 on Orange to around R345m over the longer term.

The investment decision is intriguing, with market watchers not only in two minds about the property but also about the recovery in the Western Cape tourism market.

The upper end of the Cape Town hotel market — which includes "newer" properties like the Taj and the One&Only — has been a tough space since the 2010 Soccer World Cup.

Rates have been low and occupancy percentages have dropped into the low 60s. Recovery has been hampered by the recent drought in the Western Cape, where strict water restrictions might have withered enthusiasm for holidays in Cape Town. The impasse regarding visa regulations has also hampered activity.

The FM also understands that December and January were not the most vibrant times for tourism in Cape Town, but Rossi says green shoots of recovery are already evident.

"It’s so far, so good at 15 on Orange. There is no drag on Spear. The hotel has all the makings of a property than can trade well through tough times."

It may be a stretch, but Spear’s decision to invest in an asset that was originally overcapitalised and unable to capitalise on envisaged opportunities does recall Hyprop’s acquisition of a controlling stake in retail property Canal Walk in 2003 — when most felt that the original developer, Monex, had created a white elephant.

Hyprop paid Nedbank (which had inherited the property) about R1bn for an 85% stake in Canal Walk. Today that stake is worth more than four times the original investment.

As it stands, 15 on Orange represents around 10.5% of Spear’s portfolio of R3.5bn. It’s worth noting that the property is leased from Spear by Marriott Hotels on a turnover basis. So Spear has no exposure to any of the expenses relating to the hotel operations.

Any major shifts in the value of the property could add a considerable dash of flavour — and the variable income nature of a leisure asset would also bolster yields in years when the tourism sector is vibrant.

Rossi says the big difference in Spear’s approach to 15 on Orange and original developer Quantum’s pitch is a realism around the upper end of the tourism market.

Most notably, the hotel has been rebranded as part of Marriott’s snazzy Autograph portfolio.

Renovated cocktail lounges and dining areas as well as a revamped sundeck are aimed at drawing leisure customers to the food and beverage offering.

Rossi says: "The original development could not be sold to the top end of the market because of its incomplete nature. We’ve needed to spend the money to renovate and upgrade the premises. Let’s say 15 on Orange has moved through from being on life support to rehabilitation … and now to a point where we think we can start doing some light jogging."

But he warns that it would be premature to make aggressive financial forecasts on the hotel’s performance this soon after a major refurbishment. "However, the early signs are positive that the hotel is attracting far more interest in its food and beverage, conferencing and accommodation offerings than before, now that an internationally recognisable rebranding has been completed on the property.

"We still firmly believe 15 on Orange will become one of the premier leisure assets in the country."

Rossi says Spear paid less than R20,000 per square metre for an "incredible mixed use development" situated in a world-class location and anchored by the world’s largest hotel operator. "We believe this represents ‘deep value’."

Spear shareholders, who currently enjoy a decent yield, will be keenly watching just how much flavour can be extracted from squeezing this orange in the next three years.