Real estate endures despite constraints

Posted On Thursday, 01 October 2015 16:41 Published by
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While the local commercial property finance market has been constrained by poor economic growth, rising operating costs and low business confidence in the first half of this year, it remains buoyant, continuing the strong trend seen over the past few years, according to Nedbank Corporate and Investment Banking (NCIB) managing executive of property finance Robin Lockhart-Ross.

Robin Lockhart Ross Nedbank Property Finance

He says a notable trend for property finance since the global financial crisis in 2008 has been the improvement in the quality of the bank’s property finance book.

“Four or five years ago, 3.5% of our total commercial property finance book was problematic — that number is now less than 1.25%. This is a low ratio by bank standards, where anything below 2% is acceptable. Our credit loss ratio (bad debt as a function of the total book), which is usually between 0.2% and 0.4%, is currently less than 0.2%,” he says.

Mr Robin Lockhart-Ross notes that most competitors are experiencing similar trends.

Property finance at NCIB has consistently performed in recent years, attracting the largest market share of the commercial property finance market in the country at 34%.

“Our book reached R100bn in the middle of 2014 and then R110bn by the end of 2014 and now stands at an estimated R119bn as at end August 2015,” says Mr Lockhart-Ross.

However, he notes that there are some headwinds facing the commercial property finance market. “The upcoming implementation of Basel 3 capital and liquidity requirements is set to present some challenges that will make it increasingly difficult and costly for banks to lend on a longer-term basis.”

These requirements mean the amount of capital banks need to hold against a loan increases as the term of the loan itself increases. In addition, new liquidity ratios will be applied in 2018 that require banks to source funding for their loan books for a duration that matches the period of the loans, which will be difficult to achieve in the SA market.

This is likely to see banks shortening the period of their loans to property investors, which in turn may also result in nonbank lenders increasing their presence in the property finance market, as they will not be subject to the requirements under Basel 3 regulations.

In taking a view on the anticipated performance of the property market this year and beyond, Lockhart-Ross notes the following:

The listed property sector has seen a high level of activity, with most of the big players looking to increase their portfolios. “Growthpoint acquired Acucap Properties and Sycom Property Fund, while Redefine took a 66% stake in Fountainhead and acquired the unlisted Leaf Properties portfolio.”

He adds that as listed property funds in SA are well managed, well diversified and well hedged, they represent the safest prospect from both an investor’s and a lender’s perspective, despite the market having entered a rising interest rate cycle.

According to Mr LockhartRoss, the office market remains the most concerning for bankers, particularly in locations where there is existing or looming oversupply.

“For example, A Grade office space in Sandton has vacancy levels of above 11%.”

He says banks are cautious about funding new office developments unless they are supported by a strong tenant on a long lease, or are undertaken by a listed fund or a developer with a strong balance sheet.

He says the industrial property market has seen positive growth in the past few years, with the main reasons being the drive for efficiency and scale in logistics and distribution.

“Three or four years ago, a 50,000m² warehouse was considered substantial; now, many of these facilities are over 100,000m². The market has also been fuelled by other balance sheet transactions, such as the recent sale and leaseback deals by major industrialists like Macsteel and Aveng looking to refinance their owner-occupied property portfolios.”

He adds that while there has been substantial development activity in the Waterfall node around the Mall of Africa that is currently under construction by Attacq, overall there is not a significant amount of new building development taking place in the industrial sector.

“There is a sense of caution among bankers around retail property,” says Lockhart-Ross.

“Although a number of major shopping centres have recently come, or are coming on stream, such as Newtown Junction in Johannesburg’s CBD, Forest Hill in Centurion, Bay West in Port Elizabeth and Mall of Africa in Midrand, the reality is that very few opportunities for megaretail projects remain. Though townships and rural areas are still experiencing development and refurbishment activity by established players, caution needs to be exercised by developers and bankers to understand the reasons and dynamics that are driving retail demand in these areas, which is mostly based on supporting infrastructure as well as government subsidies and grants.”

According to Mr LockhartRoss, the residential sector is encouraging. “We are witnessing several substantial new highrise, sectional title residential developments in areas like Sandton and Rosebank, driven by proximity to work, ease of interaction and the expanded Gautrain routes.

“In addition, there is an emerging trend whereby listed property funds such as Arrowhead, SA Corporate and Redefine are acquiring and developing residential properties within their portfolios.

“This trend is not surprising as occupancy levels in residential properties in key nodes are good, while defaults and arrears are low. So it’s quite possible that we will see the formation of a dedicated residential (real estate investment trust) in the market in the near future.”

He adds that the development of student accommodation is also attracting more entrants and gaining more traction, with the likelihood of a student accommodation fund coming to market soon.

Source Business Day

Last modified on Thursday, 01 October 2015 18:30
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