ALTHOUGH commercial property in SA is not out of the economic woods yet, several key factors are converging to make the sector appealing to investors once again.

“We believe we are not really out of the slump yet, and so we are expecting economic and property fundamentals to remain challenging for some time,” says Carl von During of Broll Property Group.

“But that is not to say property investors are not continuing to search for, and find, new opportunities.” Tenant fundamentals are the key to judicious investment decisions in the market, Mr von During says.

He says properties with secure tenant covenants are much in demand, and investors hunting for guaranteed growth would do well to look for such buildings.

Mr von During says that while there is demand for secondary properties — where capital rates are more wide-ranging than in the past — substantial equity is needed to fund deals, and this is limiting the number of transactions that are being concluded.

Demand for prime property is expected to remain strong but the constraint will come from the supply side, with desirable properties hard to come by. Generally, there is a limited supply of investment properties for sale. “We do, however, see some selling as property funds refine, right-size and balance their portfolios,” Mr von During says.

“We have not seen forced selling, as expected, in the South African commercial market. This is mainly a result of the massive rerating of the commercial property sector that occurred before the recession and left SA’s commercial property market in the favourable situation of having low loan-to-value ratios (gearing). This, with the low interest rate environment, has benefited commercial property owners.”

At the same time, there has been a drop in rental levels being achieved across all sectors.

This is mainly because of weak tenant demand and increased vacancy levels.

Still, he says, while the funding environment is challenging, the sector has not been as adversely affected by the recession as it has overseas. This is mainly due to the low gearing and low interest rates. Oversupply has also been limited by the restriction of new developments due in part to the Eskom power crisis and the National Credit Act.

However, Mr von During says escalating utilities costs will result in tenants seeking buildings that offer greater efficiencies.

“Landlords will need to be proactive, ensuring operating costs are closely monitored with the implementation of effective facilities and property management strategies.”

He says while an expected upswing in the interest rate cycle will put property investments under pressure, it is fair to say that property owners have benefited from the rerating and several years of low interest rates.

Source: Business Day