Conservative bankers save us from next market nightmare – analysts.
Not so long ago commercial property, globally, was a popular asset class for many investors and financing acquisitions was easy. But that has all changed since the recession.
According to The Economist commercial property in most parts of the developed world is in deep trouble. Cheap financing has dried up and property values are falling. The cost of borrowing has increased significantly and banks have stopped lending. Worryingly, there is trouble looming for commercial mortgage-backed securities – effectively real estate loans bundled into complex financial instruments rather like household mortgages were tied up in toxic debt.
The Economist suggests that unlike other property busts, this downturn has not been driven by speculative overbuilding but by investors’ enthusiasm. Institutional investors who lost a lot of money when the dotcom bubble burst were persuaded that switching to property would diversify their portfolios and reduce their risk.
At the time, there was lots of cheap finance in the market and investors were driven to continue borrowing to buy buildings, pinning their hopes on the rental yields and capital growth to repay debts.
But local commercial real estate experts are confident that South Africa will be shielded from the next crisis threatening to wash through global financial markets.
South Africa’s commercial property sector entered the downturn in a fairly strong position and never really opted for securisation, a form of structured finance in which assets are acquired and pooled together then offered as collateral for third party investment as the US and UK, says Francois Viruly, an economist and professor of property studies at the University of Witwatersrand.
He says South Africa has not been as badly affected by this downturn in commercial property as seen in many developed countries in general. Nevertheless, things are changing. Vacancy rates are rising at the moment and rentals have stalled. Surprisingly, he says CBDs across the country have lower vacancies compared to other areas.
In the past two years, banks were over-enthusiastic about lending and when recession hit, South African banks took the hint from affected markets and have since become more conservative.
Viruly’s general view is that some commercial properties are overpriced.
Owing to fairly prudent fiscal and financial discipline, South Africa has not been impacted to the same extent as those markets where securisation caused havoc in the commercial property space, says Marc Schneider, of IPD SA.
Schneider points out South Africa is in the grips of an economic recession rather than a financial collapse.
He says commercial rental growth has levelled off and this is likely to be negative in real terms. Vacancies too are rising but not to the extent anticipated.
Debt funding has also become expensive as is the norm globally, but the commercial property market has not been severely impacted and property values have not fallen to the extent seen globally.
According to property analyst Zayd Sulaiman from Catalyst Fund Managers, the listed sector has low debt levels with an average of less than 30% – another source of comfort for those who might be concerned about any fall-out here from the global commercial toxic debt woes.
Furthermore, The Economists points out that property owners do not like to sell into a falling market, though some distressed sales are still occurring.
Analysts believe distressed sales in South Africa’s commercial real estate sector are not significant. Problems have emerged mostly around new developments where developers cannot get more funding to complete building rather than around existing properties.
Distressed sales’ stock is mainly in the hands of unlisted private property portfolios.