By Richard Thomas; Regional Executive: Nedbank Corporate Property Finance Cape
The challenges that have faced South Africa’s property markets in recent years have served as a stark reminder that there is far more to the movements in this sector than construction, development and price trends. The truth is that developments in property – whether in the retail, commercial, industrial or residential sphere – are largely the consequence of broader movements in local and global economies.
And, while property will always require the physical presence of built structures, the market ultimately rises or falls according to the thoughts and actions of those who invest in these physical assets.
Against this backdrop, the truth that ‘capital follows value’ most certainly applies to the property market, which is why this market cannot escape the effects of the current search for yield by the majority of participants.
In South Africa in particular, this trend is being somewhat tempered by the growing realisation of the need to channel property investment into quality assets, which are becoming increasingly hard to come by.
This quality-driven value approach represents something of a paradigm shift from the historic tendency within property market circles to base investment decisions almost exclusively on value growth potential, without much consideration of the sustainable quality of the asset concerned.
The shift towards focusing more on asset quality, however, brings with it a greater dependency by the property market on stable economic conditions and this, in turn, is subject to a measure of political stability.
Unfortunately, the looming period of wage negotiations coupled with South Africa’s tenuous position on the cusp of an international investment status re-rating, makes such economic and political stability unlikely in the coming months. And given that our country’s property market movements are primarily sentiment-driven, it’s unlikely that the rest of 2013 will be a particularly comfortable period for most property stakeholders.
The one sector that continues to buck this trend, however, is listed property where significant positive movement continues to be the order of the day. Over the past decade or so, we have seen continued movement in yields and cap rates to the point that, for the large cap property stocks, these are now in the region of 5% to 6% – effectively bringing these into the ‘risk-free’ realm of government gilts and putting them on a par with traditional blue chip equity stocks in the eyes of many investors.
This points to a growing acceptance by investors that these large cap property funds are here to stay. It also raises the likelihood, given the challenge of finding quality property assets, of further consolidation as these large funds acquire promising smaller cap entities going forward. Interestingly, this consolidation has also resulted in some asset sell-offs by larger listed funds, and many of these are now being acquired by individual and collaborative private equity players and other stakeholders seeking to establish small listed funds.
Of course, that’s not to say that the immediate future of the property market is entirely dependent on listed property activity. In fact, despite the difficult political and economic backdrop, there have been some promising moves around physical property development in various sectors.
Retail is a case in point, with a number of large regional shopping centres valued at close to R2 billion taking shape – many of them in areas not traditionally associated with retail developments of this size or nature.
Some positive signs of a tentative upswing in residential property can also be observed, primarily to a surge in developments aimed at meeting the continued growing need for affordable and convenient student accommodation across South Africa.
Storage is another sector where there has been significant activity recently, with investment interest from a number of listed funds and financial institutions serving to enhance the profile of the industry and facilitate the national expansion plans that are central to many of the more successful storage company business plans.
In the Cape, specifically, commercial and industrial property remains somewhat brittle with economic challenges driving many manufacturing-linked businesses to downscale and a lingering oversupply of A-grade office space still weighing on occupancy levels. That said, there are nodes of fast-growing commercial activity – such as Century City in the northern suburbs of Cape Town, and the Portside Precinct and Roggebaai on the outskirts of the CBD – where innovative approaches are now reaping attractive rewards for commercial developers and investors. The same is true of some industrial nodes, notably near the Cape Town International Airport, where a number of large-name national organisations have been establishing or expanding their Cape-based distribution centres.
However, while opportunities like these certainly still exist for the more savvy property developers and investors, these have to be viewed against the backdrop of lingering economic concerns that are now having the effect of dulling what little positive sentiment may still have existed, until recently, in certain sectors of the market. And while it appears that government recognises the urgent need that exists to address those issues that it can in order to restore this positive investor sentiment, until this is achieved, any optimism that property stakeholders may feel regarding the sector is understandably likely to be of the distinctly cautious variety for the foreseeable future.