Ian Fife

There’s been a long silence from the developers of Cape Town’s V&A Waterfront, two years after they bought the iconic property from Transnet. With the risk that deep recession could follow the current global meltdown, the consortium of banks that funded the R7,3bn purchase — Absa, FirstRand, Standard Bank and Investec — may start worrying that Dubai World and UK-listed London & Regional Properties will put the project on hold. That would deprive them of much-needed and substantial business.

This is probably the biggest, most complex and most sensitive property issue the banks have today. It’s not the only one.

There’s also a growing band of distressed property owners, notably among developers of rural golf estates and large residential projects. If the property cycle follows its typical pattern, their distress is likely to emerge publicly next year as the banks put the properties up for auction. A few surprise collapses will probably accompany this. Yet examples of finance gone sour are likely to be sparse in a commercial property market that has had spectacular growth for 15 years. It’s produced a score of billionaires and hundreds of millionaires with plenty of equity in their portfolios who are easily able to service their debt. The listed property sector has an average debt-to-property value of about 30%, compared with a world average of nearer 60%.

This boom has not eliminated SA’s historic shortage of offices, factories, warehouses and shops after 30 years of decline. Rents continue to grow. But the current financial market meltdown and the fear of a global recession have created a ceiling on rent, says commercial broker Mark Bradford “Corporate tenants are balking at paying more than R150/m² net for prime offices in places like the Sandton CBD, or R50/m² for prime industrial space,” he says. “But the letting market remains healthy.”

Nedbank corporate property finance CEO Frank Berkeley estimates that banks have lent between 10% and 15% below last year’s mortgage advances. He guesses that lending could fall another 5% if the economy slows further following the current credit crunch.

“Instalment arrears have risen from last year,” he says. “But they were virtually nil in 2007. We started tightening up lending about 18 months ago, so most of our lending is secure.”

Developers say the banks have tightened up further recently, reducing lending from 80% or more of the purchase price of bare land to 60%. A few developments have stopped because finance in principle has not been confirmed or has turned out to be too expensive.

But Berkeley says though purchase yields have “moved out a bit” — this means prices have fallen — “there is no huge fall-off in demand. We are certainly not retrenching. Our people are working flat out.”

He says the banks would probably help nurse owners of existing buildings with reverse cash flows through the next 18 months because they are confident of the future of commercial property. “We would probably reprice the finance, and could take equity,” he adds. “But up to 100% funding is available for good commercial projects with strong tenants signed up. We think financing costs will start falling next year, though quite slowly, and the market will slowly strengthen.”

Berkeley says he can’t understand why residential lenders are limiting loans to 80% of value for homes over R800 000 “if a buyer can afford to service a 100% bond. It’s unlikely rates will go up; they are more likely to go down next year.”

Saul Geffen, CEO of mortgage originator ooba, says residential lending has fallen 70% this year because of tighter bank lending criteria, increased deposit requirements and a fall off in home buyers.

Property prices in some middle- and lower-priced suburbs have fallen. Despite this, deeds office data indicates that the national average property price is still above last year’s, though heading for a decline next year. Originators, estate agents and conveyancing lawyers are the main victims of the turnover slump. There have been widespread retrenchments in these industries, which affects the economy beyond property.

“But for us the worst is over,” says Pam Golding Properties executive director Ronald Ennik Samuel Seeff says his eponymous company is helping to nurse about a dozen of its 250 licensed agencies around the country, “but we are better off than most”.

Source: Financial Mail