A RECENT report released by the Alliance Group shows that in the third and fourth quarters of this year strong signs of increased commercial sales activity are evident but the market is still far quieter than two years ago.

Alliance’s November commercial research report analyses the burgeoning commercial property auction industry. It says investors who can raise financing or have access to cash are seeking value in anticipation of a rebound in property values over the next two years.

Aside from increased concerns about tenants, the report shows that a year into the global downturn banks’ stricter lending guidelines have constrained the market.

Rael Levitt, Alliance Group CE, says: “The report shows that the market bottomed out in July and sales confirmation rates have jumped over the five months since then, with a marginal decrease in the reserve sale price variance.

“Both these indicators suggest an improvement, compared with results from early this year.”

Overall, while there appears to be increased activity in the market, commercial property sales at auctions performed well below July 2008 figures — just before the international credit crises began.

“Successful sales rates in 2009 have decreased year-on-year. However, the confirmation rates for Alliance’s August to October auctions have increased, with a 67% success rate at recent auctions in Johannesburg, Cape Town and Durban.”

Gavin Adie, who heads the group’s commercial research team, says: “From November last year to March this year sales and prices fell sharply and we had a torrid time.

“The low sales confirmation rates in the first quarter of this year were largely due to limited credit supply and extremely selective demand patterns, a function of credit supply.”

He says rental income and tenant profiles, as well as the location of a property, have become key factors determining price and the availability of finance.

“However, although properties that are not highly rated are receiving softer yields, it is interesting to note that 56% of all commercial property sold at auction has been vacant property.

“This reflects both the current commercial market climate of increased vacancies and the growing level of distress in corporate liquidations.

“The high percentage of vacant property sold may also be a reflection of where real opportunity exists, and hence the demand.”

The report says that in the last quarter several liquidations, including Cape-based City Capital, Genesis Property and King Financial Services, will bring some distressed inventory to the market.

The report also indicates an emerging trend of increased prices for higher value prime commercial properties.

“We are finding that dependable cash flow and strong covenants are attracting the highest prices and strong yields. While 44% of all property sold was tenanted, the average selling price has grown to R7,5m, with a number of large commercial sales above R30m.”

He says the purchaser profile for high-value properties has generally been wealthy individuals who are not restricted by tighter credit policies.

Adie says recent announcements by leading listed property group, Redefine that it will be offloading a significant parcel of smaller properties that do not fit its strategic investment profile indicate that 2010 will bring far more inventory to the market, as smaller funds, private investors and individual consortiums snap up these properties.

Levitt says: “Over the next 12 months we a will see a structural realignment in the commercial property market as larger, newly consolidated property funds offload several billion rands of noncore investments to private investors.”

“We have already seen some of this towards the end of this year.

“Our latest research report identifies the emergence of increased market activity, a process of thawing, and new, higher return levels. This trend appears set to continue.”

He says the results in the last quarter have been significantly better than those in the latter months of last year, when extreme volatility and frozen credit markets resulted in far higher spreads and unrealistic seller expectations.

“Quite simply, last year many commercial sellers were looking for unrealistic prices and couldn’t get them. The recession has brought a dose of reality to many sellers who are now accepting lower prices, thus strongly increasing sales activity as investors start finding real value.”

He says although the data sample of income-generating properties reduced moderately over recent months, average initial yields remained steady, holding back from their softening trend over the first two quarters of this year.

The lowest average yield was again experienced in the Western Cape at an average of 10%.

Gauteng followed at 11%, with KwaZulu-Natal recording the top average yield of 13%.

He says oversupply is a challenge facing the market.

Source: Business Day