“Opportunistic and doom-laden commercial property investors, who were waiting for the market to collapse like the beleaguered residential development sector, have been disappointed,” says Auction Alliance CEO, Rael Levitt.
There has simply been no one cashing in on prime, distressed commercial real estate. “The properties that have come under the hammer have tended to be problematic assets that investors would have steered clear off, even in the best of times,” says Levitt. The best distressed assets that have come to the market have arisen from failed investor schemes, where the underlying asset was strong but the investment vehicle was either fraudulent or over-geared. “In reality we have seen lots of failed developments under the liquidation hammer, but there has not been one property fund that has put its best properties to the market.
“Commercial property, which was not at the heart of the property crisis, has in fact held up surprisingly well in South Africa, probably off the back of a strong listed property sector,” explains Levitt. South African investors, who are now operating in a 37-year low interest rate environment, now have a growing interest in commercial property, but they are only looking for deals in the best locations with the strongest tenants. “We have seen that low interest rates make the yields on offer from commercial property look more attractive than ever, and there is strong demand for reliable rentals,” says Levitt. The cash flow from tenants is more stable than that from equities and offshore currency. For those investors who are concerned that inflation may rear its head again, commercial property has always been a useful hedge against inflation because lease agreements can be renegotiated with tenants to reflect rising prices.
Investing in commercial property has paid off handsomely for many investors after the 2008 crisis, particularly with stellar results from the listed sector up to the end of 2010. “We have been saying for some time that good commercial property is really good and poor property is really poor, and this two-tier market is growing wider in 2011. Prime locations are where prices have remained annoyingly strong for those in search of a bargain.
In South Africa, where the bubble in commercial property was less dangerous than residential property, there may have been too much development and some over-supply in certain sectors. When banks were giving 80% commercial property loans it drove up demand and reduced yields. Certain banks fuelled this boom by getting involved in equity participation models and giving 100% funding to developers. Rapid rental growth also fuelled developments, particularly in nodes out of traditional urban zones. Now demand for developments has slowed down as banks are shying away from new funding and there is less development in the pipeline. The chances of a surge in new development activity is slight and debt financing, which lenders class as risky, remains tight. That may cause a further surge of demand for strong cash-yielding properties and result in negligible demand for marginal commercial assets in poor locations. We believe that the growth in commercial property will be confined to trophy assets in prime locations, which are either well let or can easily be tenanted with long leases. For offices, that means buildings in prime nodes such as Sandton, Tyger Valley or Umhlanga Ridge. For retail centres, it means properties in up market suburbs or busy traffic nodes. For the industrial sector, it means single-tenanted buildings, with long leases near busy transportation nodes.
In the 2004-2008 commercial property boom bidders at our auctions would not differentiate between top-quality trophy assets and secondary ones. Bidders chased commercial property of all sorts, closing the yield gap between the best and the rest. That is definitely not the case anymore. Our investors are now generally a lot more prudent, largely because funding isn’t that freely available and they have a lot more of their own cash in the deal. That points to prime properties in prime locations, where demand for high-quality tenants prevails. Those investors who were planning to buy distressed assets are actually now focusing on safer assets in good positions. Talk of vulture-funds and distressed property funds never came to fruition in the commercial property market. Now investors are chasing trophy assets and the gap is widening with vacant buildings in out-of-the-way areas attracting very little interest.
We are concerned that the gap between good and bad is widening and this makes our job even more challenging, to dispose of the properties that are distressed and coming to auction from banks and liquidators.
Publisher: eProp
Source: AG
