This is according to Tony Bales of Bales Delaporte Commercial Property Dealmakers, who questions whether the recent rises in interest rates have had any effect on the commercial property market?
 
“Both privately held property and listed property funds have seen unprecedented capital growth in the last few years, resulting in portfolio yields at historically low levels - even in international terms.”
 
“General consensus is that buyers have been factoring in future rental growth and have hence been prepared to pay premium prices for properties or portfolios that are likely to show solid rental growth,” says Bales.  “It could be said that buyers have simply purchased future rental growth and recent results of some of the JSE listed funds have shown significant improvements in income returns, thus justifying the purchasing frenzy of late.”
 
However, according to Bales, no one really factored in interest rates rising to the extent that they have recently. 
 
“It is widely accepted that another 50bps hike will occur before year end, with mixed opinion on even further rises thereafter.  Thus prime will be at 14% by year end and possibly even higher early next year!  Assuming a lending rate of prime less 1%, then this is a 37% increase in mortgage repayments.”
 
“There is a lot of silent suffering amongst leveraged property owners at the moment.  This is compounded by upward pressure on bond yields resulting in downward pressure on the listed funds.  The listed sector has also understandably taken a more selective approach to acquisitions.”
 
Bales explains that during the last few weeks more properties have been offered for sale, albeit at premium prices, and predicts that as more properties enter the market, the keen sellers will have to sell and accept more realistic prices. 
 
“The higher interest rates also put pressure on economic growth and hence the capacity for companies to pay higher rentals, this is likely to dampen the enthusiasm of commercial property players for excessive acquisitions.  The nature of buyers is also changing with more cash-flush purchasers starting to emerge and sellers will need to put a higher emphasis on concluding transactions with solid purchaser covenants.”
 
“This is not all bad news,” says Bales.  “We see this more as a return to normality than a downturn and property players in SA need to be able to operate in a high interest rate environment (relative to the majority of first world countries).”
 
“Yes, the commercial property market has turned, but it is likely to be a change in course rather than an about turn,” concludes Bales.
Publisher: Bales Delaporte
Source: Bales Delaporte