Mr Thomas says developments in property — whether in the retail, commercial, industrial or residential sphere — are largely the consequence of broader movements in local and global economies. "While property will always require the physical presence of built structures, the market ultimately rises or falls according to the thoughts and actions of those who invest in these physical assets," he says.
"Against this backdrop, the truth that ‘capital follows value’ most certainly applies to the property market, which is why this market cannot escape the effects of the current search for yield by the majority of participants."
In South Africa in particular, this trend is being tempered by the growing realisation of the need to channel property investment into quality assets, which are becoming increasingly hard to come by, Mr Thomas says. This quality-driven value approach represents a paradigm shift from the historic tendency in property market circles to base investment decisions almost exclusively on value growth potential, without much consideration of the sustainable quality of the asset concerned.
"The shift towards focusing more on asset quality, however, brings with it a greater dependency by the property market on stable economic conditions, and this, in turn, is subject to a measure of political stability," Mr Thomas says.
"Unfortunately, the looming period of wage talks coupled with South Africa’s tenuous position on the cusp of an international investment status re-rating make such economic and political stability unlikely in the coming months. Given that property market movements are primarily sentiment-driven, it’s unlikely that the rest of this year will be a particularly comfortable period for most property stakeholders."
The one sector that continues to buck this trend, however, is listed property, where significant positive movement continues to be the order of the day. "Over the past decade or so, we have seen continued movement in yields and cap rates to the point that, for the large-cap property stocks, these are now in the region of 5% to 6%," Mr Thomas says.
This has in effect brought these large-cap stocks into the "risk-free" realm of government gilts and put them on a par with traditional blue-chip equity stocks in the eyes of many investors. Further, this points to a growing acceptance by investors that these large-cap property funds are here to stay, he says.
It also raises the likelihood, given the challenge of finding quality property assets, of further consolidation as these large funds acquire promising smaller-cap entities. "This consolidation has also resulted in some asset sell-offs by larger listed funds," Mr Thomas says.
"Many of these are now being acquired by individual and collaborative private equity players and other stakeholder seeking to establish small, listed funds. That’s not to say that the immediate future of the property market is entirely dependent on listed property activity.
"In fact, despite the difficult political and economic backdrop, there have been some promising moves around physical property development in various sectors. The retail property sector is a case in point, with a number of large regional shopping centres valued at close to R2bn taking shape — many of them in areas not traditionally associated with retail developments of this size or nature."
Some positive signs of a tentative upswing in residential property can also be observed. There is a surge in developments aimed at meeting the growing need for affordable and convenient student accommodation, among other signs.
Storage is another sector where there has been significant activity recently, with investment interest from a number of listed funds and financial institutions.
Mr Thomas says in the Cape, commercial and industrial property remain somewhat brittle, with economic challenges driving many manufacturing-linked businesses to downscale and a lingering oversupply of A-grade office space still weighing on occupancy levels.
Source: BD
