Robin Lockhart-Ross, Managing Executive at Nedbank Corporate Property Finance
Growth in South Africa’s commercial property industry over the next few years continues to be dependent on government’s redress of critical infrastructure backlogs and capacity constraints to offset the dampening effects of low economic growth. Aside from ongoing electricity supply shortages, more recent reports point to looming water supply issues that could further inhibit property development.
But at municipal government level the heightened focus on and investment in expanding and improving transport infrastructure and promoting mixed-use activity nodes along major transport corridors and around key transport interchanges bodes well for commercial property development within metropolitan areas. A greater degree of collaboration and coordination is becoming evident between the various central, provincial and municipal government departments and agencies which all play roles in the approval, provision and funding of infrastructure that enables and facilitates private sector driven property developments.
This is according to Robin Lockhart-Ross, who was recently appointed Managing Executive at Nedbank Corporate Property Finance, which holds the largest market share in the commercial property finance industry in South Africa.
He notes that, in spite of infrastructure backlogs and capacity constraints at national and municipal government levels, the South African commercial property market has proven to be remarkably resilient in recent years – a trend he expects to continue in the foreseeable future.
Although growth in the property sector remains primarily a function of GDP growth, which suggests that muted economic activity combined with rising interest rates could slow down the market next year, 2014 has been an excellent year for Nedbank’s Corporate Property Finance division, “We actually conclude some of our best property finance transactions when the economy is subdued,” says Lockhart-Ross. “Financial feasibility of a project is even more critical amid heavy competition in tight economic conditions, and this is perhaps why developers braving the lean market reap great results when the economy recovers.”
Lockhart-Ross says that solid growth in loan demand is being seen in the retail property sector, driven in the main by peri-urban and rural shopping centre developments catering for a growing emerging middle class population. “Whereas usually only one or two major shopping centres break ground on South African soil annually, the past three years have seen a higher level of activity, with several large developments recently completed and in progress, and several more projects being planned.”
He notes that banks are far more considered now in their lending criteria given the lessons of recent history. “The bulk of defaulted loans remain stalled residential developments that will have to be traded out over an extended period of time. The critical issue going forward is whether banks will opt to push for higher growth in their loan books at a time when it is inappropriate to do so.
“Our ethos at Nedbank Corporate Property Finance is to avoid chasing market share growth in a rising interest rate cycle, but rather to follow a sustainable approach that balances risk and reward through the economic cycle, and this is a philosophy that we continue to apply,” says Lockhart-Ross.
He adds that the perceived riskier environment, coupled with the new and evolving Basel regulations, has also led to a trend within the commercial property finance space towards shorter loan periods. “Typically, a loan used to be for a 10 year period. However the banks’ cost of capital and liquidity has increased, so banks have begun charging liquidity premiums which vary according to the term of a loan, which has prompted the move towards shortening of loan terms.”
Lockhart-Ross notes that in 2014, Nedbank Corporate Property Finance passed an important milestone of reaching a loan book of R100 billion, a long time goal for the division following the market downturn that began in 2008/9, which was particularly gratifying in that this target was achieved a year ahead of schedule.
He adds that while there continue to be attractive funding opportunities locally, in light of the current economic environment and Nedbank’s market leading position, there is also a clear intent to diversify into Africa over the next few years. “This will be achieved through a two-pronged approach of following our South African clients into selected jurisdictions, as well as leveraging the existing presence of Nedbank’s African subsidiaries, plus its alliances with Ecobank and Banco Unco to provide a premium service to our clients across sub-Saharan Africa,” concludes Lockhart-Ross.