Blog (30)
One couldn’t possibly be too careful. Three years into recovery and the European crisis hanging over us like a Sword of Damocles, with media reports this month of bankers calling the bottom of their credit impairment cycle as their book growth is starting to create renewed increases in portfolio provisions, some are looking out for the next recession while others may just want to turn cautious naturally.
If not in South Africa, where does future expansion lie for the Johannesburg-based real-estate investment company Resilient, which has a local market capitalization of 11 billion Rand?
Despite the World Economic Downturn South Africa has continued to successfully build and fill new shopping centres with both tenants and shoppers. Resilient has been at the forefront zeroing in on non-metropolitan shopping malls outside of the major urban nodes. Towns like Tzaneen, Rustenburg and Klerksdorp come to mind.
Resilient also holds strategic interest in Jabulani Mall in Soweto (55%), Highveld Mall in Emalahleni (60%), 70% of the I'langa Mall in Nelspruit and 60% of the Mall of the North in Polokwane . The firm also owns the Diamond Pavilion in Kimberley and the Tzaneng Mall in Tzaneen. Resilient holds 12.9% of the Capital Property Fund, 22.0% of the Fortress Income Fund – B and 18.6% of New Europe Property Investments plc. It also owns Property Index Tracker Managers, the company that manages the Proptrax exchange traded funds.
Now Resilient is looking to Nigeria for its future. This may have some people worried to see a big player like Resilient apparently ‘abandoning’ the local market. But looking offshore is nothing new to Resilient. Back in 2007 it was involved in the establishment of New European Property Investments, seeing shopping malls being built all over central Europe. The fund was initially listed on the London Stock Exchange, but went on to acquire a secondary listing on the JSE in 2009.
But looking locally, Patrick Cairns for Moneyweb writes: “Resilient's strategy of managing shopping centres outside of the major centres in South Africa has been a very successful one. By focusing on under-serviced areas, the group has tapped into a growth story that has delivered excellent returns.”
Some would say this is due to a variety of reasons: for one, the reduced competitive playing field in small town retail nodes. Secondly shoppers in these towns are less likely to be debt-laden in comparison to their counterparts in urban areas. Increased levels of government social spending have also given more buying power to rural dwellers.This translates into a consumer group with high levels of disposable income available to use at Resilient's shopping centres.
So what’s changed? According to The Citizen’s Micel Schnehage, Resilient’s Director Des de Beer explained that it’s the firm’s struggle with local government. “(Resilient) is hampered by extensive bureaucracy and red tape, resulting in expensive delays.” He went on to state that the era for Resilient to develop non-metro malls was over.
What seems to have been the last straw was the loss of documents pertaining to the Mafikeng Mall by local authorities, 17 times at that! “They’re not accountable to anyone so they don’t really care," said de Beer to the Citizen. It is painfully obvious why some suggest that the facilitation fee (read bribe) was not paid over. Kudos to Resilient if this is indeed the case?
Apparently a partnership with the Sasol pension fund will result in the continuation of the development of malls in Secunda and Bergersfort.
But why Nigeria? Better yields is the short answer. De Beer is expecting returns of greater than 10%, and in dollars too. Resilient believes there is a sincere intention in Nigeria to see the country raised up and that officials are largely positive ‘facilitators’ of that process (excuse the pun). One may wonder if the company is being naive but recent reports of land being donated to developers to ensure development takes place certainly shows intent.
The Financial Mail reports that Resilient Property Income Fund Ltd plans to spend more than 1 billion rand building 10 shopping malls in Nigeria. The malls, 10,000 square meters and 15,000 square meters in size, will be built over the next three years in the capital, Abuja, and the city of Lagos respectively, the main commercial hubs. Shoprite, Africa’s largest food retailer, will be the major tenant.
Bloomberg reports that Standard Bank Group Ltd, Africa’s biggest lender, and construction company Group Five Ltd. (GRF) are also partners in the deal.
The FM reports that De Beer would like to list the shopping centre fund in Nigeria once it reaches the right critical mass. This would be a similar approach to Resilient’s entry into Romania back in 2007 through New Europe Property.
One can’t help being a little concerned that if a big local player has chosen to go fishing elsewhere what are South Africa’s prospects as far as foreign investment goes? Time will tell.
It seems Africa’s gain is South Africa’s loss. Then again, a rather ingenious strategy of playing reverse psychology with the local property/retail market in order to dissuade competition in SA’s untapped rural markets, could also be at play?
According to a recent report by Jones Lang LaSalle (JLL), focusing on Johannesburg, the commercial market is “beginning to favour landlords in the prime office accommodation as they are beginning to achieve asking gross rentals and reduced vacancies albeit limited speculative completions”.
The graph below shows the ratio of unlet new office space to total new space. The general trend has been one reflecting a lowering ratio, however in the case of Durban and Johannesburg, the ratio has increased. In Durban's case it is more a function of new space being absorbed into the mainstream market, whereas in Joburg's case the amount of new space on the market (just over 358,000m²) has increased to its highest level since Q3 2009. With the ratio of unlet new space at just under 60% - whilst not that high by historical perspective - could still negatively impinge on the overall vacancy rate going forward.
According to JLL nevertheless, investors are still conservative in committing to new speculative developments due to uncertainty, suggesting that speculative developments represent about 36% of the pipeline in the next 2 years. With all the committed construction activity in the Johannesburg area, office stock is expected to reach over 8,6 million m² in 2012 and 8.8 million m² in 2013.
JLL indicates that Sandton and Bryanston continue to be nodes of choice for office accommodation where heightened activity was noted during Q1 2012. Large deals in the market during in this period are the take up of over 16,000m² by the law firm CLA Cliff Dekker in Sandton and the 3,000m² office lease by Huawei Technologies SA in Bryanston.
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Whilst the European crisis and it’s ripples to South Africa have got grey suited local bankers all in a Windsor knot, one motor finance company is putting its hand up making itself available for, what is believed in some circles, to be signs of better times ahead for residential property.
In a move that in itself may boost the whole house marketing sector, luxurycar manufacturer, BMW, has made public its plan to move into the home finance sector. Actually BMW have been easing its way into this world for some time. But now there is a drive to acquire a greater number of applications.
In pursuit of motive for the movement into the housing market BMW’s response has been a bold one. BMW intends to counter what it considers to be extremely poor service by banks. It seems that banks are quivering in the face of implementing Basel III.
Basel III is the third of the Basel Accords. It was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis.
With the onerous requirements of Basel III on banks, one ought not to be surprised to see that non-bank players are becoming more prominent in the SA home loan market.We should expect this to continue.Expect that the standard home loan interest rate will have to be set one or possibly even two percentage points above prime, because the cost to the banks of funding these loans will rise that much.
Back to BMW, an investigation by Finweek found that: BMW Finance provided "better service, a more competitive interest rate & lower administrative costs than any of SA's big 4 banks." "FNB was the only bank that came close to providing a deal that competed with that of BMW Finance. However, the bank's initiation fees were higher & you are required to open a primary bank account with it."
Bill Rawson of Rawson Properties said in a press release that the move by BMW Finance, in his view, makes complete sense because the existing BMW clientele base is almost certain to be an excellent initial target market. The link-up between motor cars and homes also increases the security of the loans because homes are a more reliable asset than vehicles.
Watch this space as more motor finance houses follow suit.
More up-beat than the effects of BaselIII is the belief in a slow but steady upturn and recovery in the property sector. BMW’s lead with a plunge into the market is not all that has estate agents aflutter.
- the average House Price Index is now at a two year high and rising at 8,6% per annum.
- a 12% plus decrease in civil summons in the first quarter of this year.
- a 42,4% decrease in liquidations
- the number of 100% bonds issued has risen by over 35%.
(According to the FNB Property Barometer.)
So back to the banks who are in fact now easing up on the criteria that they apply to home mortgage loans (whilst still adhering to National Credit Act regulations), says Leonard Kondowe of Rawson Finance, the bond originators serving some 160 Rawson Properties residential property marketing franchise teams countrywide.
Kondowe points to several indicators point to the whole bond mortgage scene becoming far more consumer-friendly. In particular, he mentioned that:
• One of the top banks in South Africa is now quite regularly granting 100% loans to salaried applicants for properties valued below R1,5 million, the offers valid for both clients of this bank and those who bank elsewhere. To be successful, said Kondowe, the loan applicant must be able to show that he has a favourable repayment profile, that he had not in the past 12 months taken out an unsecured loan with a monthly repayment not exceeding 10% of his gross income and that any such loan is below R50 000.
• Most banks have increased their 100% loans to the affordable housing segment (i.e to those clients earning single or joint income of not more than R18 000 per month.)
•Rawson Finance has seen their grant levels increase by more than 100% from May 2011 to May 2012, a sure sign that the South African property market has taken a turn for the better.
The current low interest rates, said Kondowe, will probably be maintained for the foreseeable future and many analysts seem convinced that South Africa can ride out the effects of the European Financial Crisis. Although difficult times may be ahead they are unlikely to differ from the difficult times currently experienced. The impression one gets is that though ill, the financing market is certainly not terminal and will continue to survive through innovation and customer service, thereby providing the necessary products in line with market demand.
Thanks to Rawson Properties and Matthew Campaigne Scott, eProp Contributor
In our last edition, we discussed that the eProp Commercial Property Confidence Index (CPCI) conducted over February/March 2011 and polling industry business expectations for the next six months, reached an aggregate level of 52 in March 2012. This is the first time since March 2008 that the index broke through the neutral 50 mark and speaks to a slight improvement regarding the outlook for the sector overall
By property sector and on a net-balance basis (spanning a range of +100 to - 100 and where 0 is neutral) the retail property sector has the best outlook (+7), followed closely by industrial (+4) and then offices at 0. For retail the steady path back to a more positive outlook can be clearly seen in the graph below. For offices and industrial the trend is perhaps a little more volatile which speaks to the level of uncertainty belying fundamentals generally and as compared to retail where the sentiment has perhaps been more closely informed by the consumer-based macro economic cycle.
In terms of the business issues contributing to the CPCI index, we see that the more positive outlook is influenced by a firmer expectation around the number of anticipated sales and leases volumes, as well as growth in the values attached to these. Encouragingly, on balance and for the first time in a long time, growth in expected staff complement is slightly positive.
Whilst gross rental value is expected to grow, it is clear by the deterioration in Net Income, that costs remain a major bugbear to the commercial property environment. A deterioration in Cap rates is expected which in turn could account for the more bullish outlook regarding acquisitions. Still representing the biggest concern for the sector, is the net balance of 41% of respondents anticipating that their concerns around local government issues in which their assets are located in, will increase. Presently and over time, it also appears that the concerns in Gauteng are not necessarily worse than for example the Western Cape, though of course this is relative as the comparative level of service is not benchmarked.
Looking back at the annual total returns for commercial property as measured by IPD, we see that the 10.4% recorded in 2011 is somewhat disappointing and speaks to the double-dip notion that economic commentators alluded to back in 2009/10. As such this return is then actually not surprising. Perhaps more importantly are the drivers of returns as reflected in the first graph below; in particular the flat net income growth and more specifically the disparity between the growth in income vs. costs. This is also reflected further below showing how Net Income is a function of Base Rent + Fixed Recoveries + Variable Recoveries – Operating Costs and whereby the latter two aspects have grown in proportion.
In a select poll run by IPD concerning the outlook for 2012, 74% of respondents anticipate an improvement on 2011’s results and 24% anticipate a deterioration.
The eProp Commercial Property Confidence Index (CPCI) conducted over February/March 2011 polls industry expectations regarding business conditions for the next six months; the following is noted:
The eProp Commercial Property Confidence Index reached an aggregate level of 52 in March 2012. This is the first time since March 2008 that the index has broken the neutral 50 mark and speaks to a slight improvement regarding the outlook for the sector overall (see graph below). We will look at the eProp CPCI in further detail in our next edition.
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