Financing Ekurhuleni Strategic Land Parcels 31 May 2017

Overview of project 4 Financial Analysis 7 Overview of valuation approach 8 Value for money 10 Sensitivities 11 Job creation 12 Conclusion 13

Overview of Project

Strategic Land Parcel process Aligned to EMM’s 10 point plan 10-Point Econo-mic Plan Actively participate in the labour environment in the region Promote support of local products (Buy Local) Massive infrastructure rollout Empowerment of SMMEs through public procurement Revival of township economies (garages, shops, informal trading, foreign nationals) Provision of land available for large scale investments Accelerate the spatial economic zones programme Full implementation of the transport strategy Clear strategies of the revitalisation of the manufacturing sector A clear roadmap for the effective implementation of the Aerotropolis Master Plan

Demographic analysis model

Artists impression of a possible SLP development The main goal or purpose of the land development programme is to alter the EMM spatial landscape and optimise urban development by maximising the potential of strategic developable land and property through partnership with the private sector, lease or outright disposal of the land and property assets

Financial Analysis

Overview of valuation approach Financial model basis How is value for money determined Discounted Cashflow “DCF” Assumptions Sale or Lease Green/Brownfield Opportunity cost basis. Incremental cash flows Outputs are determined to measure value creation The model determines the value for money for each Strategic Land Parcel (“SLP”) by using the discounted cash flow method (“DCF”). It allows for assumption to be input regarding the proposed transactions. Example: Whether the SLP will be a sale or lease If it’s a sale, will this be greenfield or will it be brownfield The model is built on an opportunity cost basis. This means that the model will calculate the incremental future cash flows that result from a transaction taking into account the forgone benefits of the option which was not chosen.

Overview of valuation approach Sale vs Lease SALE LEASE Municipality receives the following: Highest & best value of property Lease payments Rates & taxes Residual value Municipality forgoes the following: Future lease payments Rates and taxes Key assumptions made: Lease period is 10 years Lease period is 30 years Proceeds of sale are reinvested at prevailing interest rates Lease payments are implied rental yield X current value Highest and best use value is received immediately Rates and taxes are ongoing Lease payments received post construction Residual value is received at the end of the lease period Lease period is 10 years as major refurb expected after 10 years and is the industry norm Lease period is 30 years as per council policy

Outputs Value for money Inputs Highest and best use value Municipal Capex Bulk Services Contribution Developer investment Outputs Internal Rate of Return (IRR) Return on investment Net Present Value (NPV) Profitability Index (PI) Highest and best use value: most recent value of the property. Reasonably probable and legal use of vacant or improved property that is physically possible-results in the highest value Municipal capex: Required by the municipality for the envisioned development of the SLP Bulk Services (Water & Sanitation) Contribution: Received by the municipality, paid by the developer/investor at the end of the construction period. Cash inflow for both sale & lease. Further development: Total cost borne by developer. Affects rates and taxes and residual value in a lease scenario. IRR: Discount rate that makes the NPV=0. In a lease scenario, the we have value creation when the IRR is greater than the WACC. In a sale scenario, value is created when the IRR is lower than WACC ROI: Return on investment on municipal capex NPV: Core metric to measure returns. A positive NPV indicates that the selected transaction creates value for the municipality compared to the forgone transaction (Lease vs Sale) PI: PV/Capex PI greater than 1 is value creating in a lease, PI less than 1 is value creating in a sale

Sensitivities Risks and Opportunities The sensitivity analysis dashboard indicates the sensitivity of the NPV of the transaction to changes in core inputs. Lease Sale

Job creation estimate This is a very high level attempt at arriving at an indicative number for job creation. We have assumed the relationship for job creation to be this equation. What its basically saying is that higher rates and taxes are a result of higher amount of investment made into the property and greater future income, therefore greater job creation. The type of development assumed for the SLP also plays a major role in the level of job creation. For e.g. an industrial zone would created more jobs or rank higher in zoning than a residential development.

Conclusion Investing in the EMM SLP programme has positive benefits from a quantitative and qualitative perspective Economic benefits Estimated combined market value of SLP’s under consideration: R 235M Estimated jobs to be created:143 243 Estimated value creation: R60M Estimated municipal capex: R291M Estimated additional investment required from private developers: R6.5B Socio-economic benefits Job creation Youth development Poverty eradication Act as game changers Destinations for investments where wealth can be created Raise vibrancy in the (TOWNSHIP) economy Require intervention or to unblock challenges Leverages investment opportunities for disadvantaged groups

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