A 'back to basics' approach for 2011

Posted On Tuesday, 25 January 2011 02:00 Published by
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The underlying economic factors that reigned in commercial property in 2010 will continue into 2011, despite a low interest rate environment and an oversupply of stock
According to Rodney Luntz, Managing Director of the High St Property Co: “The industry is witnessing an interesting phenomenon due to the prevailing economic conditions, as low interest rates are not bringing about the massive uptick in sales or leasing that everyone was hoping for in 2010,”. “With global economic uncertainty set to continue into 2011 caution will remain the name of the game even though interest rates are at their lowest levels in over a decade. A contributing factor to pedestrian growth in the commercial sector is the limited access to finance.”
According to Luntz, this stricter lending practice is keeping a number of would-be investors out of the market, as they are unable to gain access to finance on favourable terms. This means that the market is lacking the critical mass of buyers required to stimulate the market in any meaningful way. “Not even a reduction of 6.5% in the repo rate from 12% in 2008 to currently 5.5% has given commercial, industrial and residential property sales the shot in the arm it needed,” he continues. “Couple this with continued concerns around job security, consumer over-indebtedness and the need for companies to maintain adequate liquidity levels to mitigate cash-slow concerns, and we are looking at a conservative private treaty buying market in the year ahead.”
Additional factors that will affect the market include the seller's ability to hold on to investments for longer due to lower interest rates, as they try to realise the return they want. “The returns many sellers are looking for are also often unrealistic in this market, as they try to claw back some of the equity they 'lost' in the high interest rate environments of 2007 and 2008,” explains Luntz. “This creates a further disconnect in the market that adds to the suppression of sales. This may change as interest rates begin to rise which some economists are predicting will happen towards the end of 2011. Sellers may find themselves in a difficult position which will force them to be more realistic on price.”
However, one area where property investors and owners can look to mitigate risk, improve cash flow and ensure a positive figure appears on the income statement this year is the leasing sector, especially in the commercial and industrial property markets. “As a result of the oversupply of stock in the leasing sector, landlords are more amenable to deals, increased installation allowances and increased rent free periods to entice new tenants into their buildings” says Luntz. “This will make the deal more attractive for a multitude of businesses and consumers who are looking for properties but cannot buy outright. From a landlord’s perspective, locking in a tenant on a three year lease at a favourable rate would ensure the property enjoys occupancy, while also creating added value for the tenant.”
Luntz states that property professionals and agents will need to drive this trend by improving their ability to mediate between owners and tenants. “We will play an important role in ensuring both parties can benefit in the unique market we find ourselves in at the moment, be it finding new tenants or re-negotiating leases that are up for renewal,” he says. “Owners and landlords are looking for good, trustworthy tenants and those commercial brokers with the best relationships with both clients and potential customers will add the greatest value. They will also look for those professionals who have expert tenant and property management abilities to unlock further benefits, while also reducing the complexity and operational burden usually associated with renting and leasing.”
One concern for the sector, which will hopefully be clarified in 2011, is the National Credit Act and the possible impact it will have on rental agreements and the way consultants and agents canvass for business. “But overall we expect to see a gradual decrease in vacancy levels in 2011, a trend that manifested itself towards the end of 2010, as indicated by the latest office SAPOA vacancy schedule for the 3rd quarter of 2010.
“These factors do not install massive confidence in the market and it is therefore important to be realistic and wary of brokers in the market who tend to present information in a biased and inflated manner in order to secure business. This doesn’t create an ethical platform for the industry as a whole and tends to work negatively in the minds of both existing and potential clients.”
In conclusion, Luntz says that it is time for the property market to go back to basics to facilitate the shift required to realise meaningful growth in 2011. “Property consultants and agents need to play more of a facilitator role to realise the deal in a tighter market, by finding a value equilibrium for both parties,” he explains. “Working to the basic principles of price penetration, clearly communicating the value proposition of a property and differentiating the offer through innovation will go a long way to moving a property in a buyer or tenant's market. If sellers or landlords get this right there is the opportunity to realise a return in this recovering economic environment as it continues to move in the right direction,” he concludes.
Publisher: eProp
Source: THSPC

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