Gauteng Business News

Send  Share  RSS  Twitter  06 Jul 2010

INVESTMENT PROPERTY: Positive Factors Re-ignite Interest in Property Investment


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Although commercial property in SA is not out of the economic woods yet, several key factors are converging to make the sector appealing to investors once again.

"We believe we're not really out of the slump yet, and so we're expecting economic and property fundamentals to remain challenging for some time," says Carl Von During of Broll Property Group. "But that's not to say that property investors aren't continuing to search for – and find – new opportunities."

Tenant fundamentals are the key to judicious investment decisions in the current market, points out von During. Properties with secure tenant covenants are much in demand, and investors hunting for guaranteed growth would do well to look at these types of buildings.

He adds that whilst there is demand for secondary properties, where, cap rates are more wide-ranging than in the past, substantial equity is required in order to fund deals. This is limiting the number of transactions being concluded.

Demand for prime property is expected to remain strong, but the constraint will come from the supply side, where desirable properties are hard to come by.

Generally, there is a limited supply of investment properties for sale. "We do however see some selling, as property funds refine, right-size and balance their portfolios," anticipates Von During.

We have not seen forced selling, as expected, in the SA commercial market. This is mainly as a result of the massive rerating of the commercial property sector that occurred before the recession and left the SA commercial property market in the favourable situation of having low loan-to-value ratios (low gearing). This together with the low interest rate environment has benefitted commercial property owners.

At the same time, there has been a drop in the rental levels being achieved, across all sectors. This is mainly due to the weak tenant demand and increased vacancy levels.

Still, von During adds, whilst the funding environment is challenging the SA commercial property has not been as adversely affected by the economic recession as it has overseas. This is mainly due to the low gearing and low interest rate environment. New developments were also restricted, thereby limiting an oversupply, partly due to the Eskom power crisis and the National Credit Act.

Von During cautions property investors that escalating utilities costs will result in tenants seeking buildings which offer greater efficiencies. "Landlords will need to be proactive ensuring that operating costs are closely monitored with the implementation of effective facilities and property management strategies.

He adds that whilst an expected upswing in the interest rate cycle will put property investments under pressure, it's fair to say that property owners have benefited from the rerating and several years of a low interest rate environment.

The value of prime property assets is being maintained if not increasing in the current environment due to the limited supply and strong demand for these assets. The inflationary pressures on new developments, together with the cost of funding, are resulting in feasibility rentals amounting to well in excess of existing rentals. This will have the effect of limiting the viability of new developments for some time to come.

“As the market normalizes and the excess supply is taken up, rentals will correct and continue on their growth path,” says von During.

The above together with the global uncertainty, volatile equity markets and threats of high inflation has increased the demand for commercial property investments.

Von During believes that UK property assets are still a good option for SA investors especially with the current favourable exchange rates. The fundamental decision to diversify a South African property or investment portfolio into long income property in the UK makes sound financial sense with the favourable UK lease structures and the UK’s developed economy.

The window of opportunity is certainly starting to close. "The pricing of prime properties in the UK has re-rated in the past 12 months, and SA investors who bought before then have experienced excellent capital appreciation," he explains. "There are still good opportunities, but they are more challenging to find."

Broll is a multi-disciplinary property services company with over 35 years experience in the property industry. Its services include property, shopping centre, utilities and facilities management as well as sales, leasing, valuations, retail consultancy, corporate real estate advisory services, research and investment services to the retail, commercial, industrial and investment markets.

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