IN THE prevailing market conditions, disposing of a commercial property by way of auction may not produce the desired result, says Pam Golding Commercial GM Geoff Stroebe.

He says many sellers are being persuaded to put their properties on auction on the premise that this will maximise their price.

“However, this is not necessarily so as since 2007 commercial auction prices have been reducing, and many ‘sales’ knocked down on the day are unconfirmed — which means that the reserve prices are not necessarily being met.

“And while there are distressed sales, it’s also true that there are not too many ‘fire’ sales,” Stroebe says.

“Take mass auctions for example, which by their nature indicate the need to move as much stock as quickly as possible, with no time for focused, individual attention.

“Generally at an auction, if the reserve price is not reached, the seller has between 24 and 48 hours to either accept or reject the highest bid.”

He says such circumstances place a great deal of pressure on the seller to accept a bid which is lower than the original reserve price — which may well be far removed from the maximised selling price the seller may have been enticed with at the outset.

Stroebe says today’s buyers are well informed and are generally seeking a good buy which will also provide sound returns.

“Local investors are savvy and will not naively buy something on auction that is not producing a sound yield, which at present is in the region of 10% to 11% for good commercial property.

“Even owner-occupier

“This is why we prefer conventional property sales methods where we can negotiate a deal in a professional and unpressurised manner. We always act on behalf of our seller, and as soon as we receive a mandate we can negotiate, and reveal the true, intrinsic value of the property coupled with its investment and/or income potential,” Stroebe says.

Growthpoint Properties executive director Estienne de Klerk says property fundamentals, while not at the unsustainable buoyant levels of recent years, are still holding their own across most areas of commercial property.

“However, demand has softened for certain spaces and there has been an impact on bad debt books. Listed property companies will start reflecting this in their growth, which will be muted in comparison with the high levels of the past few years,” he says.

De Klerk says that with discretionary spend sucked out of the economy — as evident from about November last year — retailers such as restaurants are finding it more difficult. However, food and some clothes retailers are still doing reasonably, as are mature, dominant regional shopping centres in general.

He says the availability and cost of finance are two “very real” issues for the commercial property sector.

“Listed property companies tend to finance over longer periods, and right now it is difficult to get long dated debt. While short-term interest rates are down, rates have actually increased for longer-term finance. Banks require higher margins, together with their more conservative credit requirements,” he says.

“It would help if the capital market improves and margins return to more normal levels, bringing liquidity back into the market. A sustained lower interest rate environment will result in better fundamentals coming through for the property sector”.

Source: Business Day