Nick Wilson

Property Editor

WHILE the number of distressed sellers in the residential market continues to increase, the commercial property sector has remained resilient.

Auction house The Alliance Group says this may have a lot to do with the lower borrowing levels of the unlisted and listed property funds that own retail, industrial and office properties.

Rael Levitt, CEO of The Alliance Group, says the group has been inundated with calls from distressed homeowners and residential developers looking to offload their properties because of rising interest rates, price deflation and the fact that developers can not afford the holding costs.

The opposite is true for the commercial property sector.

Levitt says there have been only small pockets of distress and in these cases this related to businesses which were struggling financially.

Levitt says the strength of the commercial property sector has a lot to do with the original financing done through the banks by the owners, where the loan percentage to value averages about 70%.

“This is relatively low so there is equity in the commercial property sector.

“The listed property sector has even lower gearing and they’ve got an enormous amount of equity and very strong balance sheets,” he says.

Levitt says residential property bondholders had bonds of 100% or even more given to them by banks on easy terms when times were better.

When residential property prices and rentals started dropping this year, many households found themselves in a “debt trap with negative equity in their investments”.

“Quite simply the homeowner and residential investor who bought property last year with 100% or more financing are immediately in a negative equity position because of price deflation.”

He says commercial property has large amounts of equity invested in it and that unless this sector “really tanks”, which is unlikely, most commercial properties “cannot be in distress”.

Levitt says another advantage the typical commercial property investor has, is experience.

He says these investors tend to be risk averse and more astute than the average residential property buyer.

Jurie Wessels, MD of Capital Investments, an unlisted commercial property fund, says that within the commercial property sector it is important to distinguish between the different types of property.

He says retail properties are “not doing well” because retailers are the “first people to be hit in a downturn in the economy”.

Wessels says office properties can be divided into quality properties and fringe or secondary properties.

“The best quality properties in the best addresses continue to do well because tenants tend to be larger establishments that can survive a downturn like the current one. Second-tier office blocks tend to be occupied by newer or smaller businesses that simply cannot afford to rent the best office blocks.

“These newer and smaller businesses are more vulnerable in a downturn.”

As far as industrial property is concerned, Wessels says factory buildings tend to do well because so much of manufacturing in SA is linked to exports: a weaker rand stimulates exports.

He says these commercial properties tend to be owned by funds or large corporate investors who did not have to “go into panic selling” when interest rates went up, as so many households did.

“We definitely haven’t seen distressed selling in the commercial market on the scale we’re seeing in the residential market.”

Jonathan Smiedt, CEO of ClareMart Auction Group says the residential property market’s position is “not as bad” as it has been made out.

He says one of the main reasons for the drop-off in demand is the shortage of buyers because a lot of them have not been able to obtain finance on residential properties.

Smiedt says the banks are stricter and that new legislation such as the National Credit Act has also made it more difficult.

“The commercial property market is the antithesis because the banker looks at the market in a completely different light.

“He looks at the property rather than the individual and if he knows the property is a quality property with secure rental income, his granting of finance is more secure than if he had to finance an individual on a residential property,” he says.

Smiedt says rental increases in commercial property have matched the interest rate increases so these investors do not feel the squeeze as much as the residential investors.

Source: Business Day