One of the significant developments in the corporate property finance market during 2014 involved the rise in the number of commercial property players increasing their exposure to the residential rental market.
This is according to Robin Lockhart-Ross, who was recently appointed Managing Executive at Nedbank Corporate Property Finance. He says that many large property investors have been purchasing distressed buy-to-let portfolios from banks.
“Given this clear shift towards the residential buy-to-let market, we would expect to see a focused residential fund established over the next 12 to 24 months. In order for this to happen, however, we may see certain players in the market actually combining their portfolios in order to bring a viable listed residential fund to market.”
He adds that within this space, many players are also looking specifically at student accommodation. “Most major tertiary institutions are only able to supply around 25% of the accommodation needs for students, meaning there is ample opportunity to provide housing for this segment. In fact, we may even see the establishment of a new fund dedicated to providing student accommodation in the future.”
Lockhart-Ross notes that some uncertainty is set to continue within the retail property segment, given the current muted growth that has been demonstrated among certain retailers throughout 2014. However, he notes that there is still appetite for growth in the market, driven mainly by shopping centre developments in rural or lower-income areas that cater for a growing emerging middle markets. In the past three years, there has been a higher than normal level of activity, with several large developments recently completed and in progress, and several more projects being planned.
He adds that the number of vacancies within the office segment is on the increase, alongside a number of large corporates consolidating multiple offices into one large space, particularly with recent mega developments in Sandton. “There is some concern over the level of high office vacancies, which means that future projects are unlikely to obtain funding as easily as before, unless the development is tenant-driven rather than speculative.”
Lockhart-Ross says that while certain areas of the property sector are slowing down, it is positive to note that sometimes the best corporate property finance deals occur when the economy is weak. “Financial feasibility is even more critical amid heavy competition in a subdued economy, and this is perhaps why developers braving the lean market reap great results when the economy recovers.”
He also notes that a positive development following the property market slowdown in recent years is that banks are far more considered on their lending criteria now. The bulk of defaulted loans, according to Lockhart-Ross, remains stalled residential developments that will have to be traded out over a longer period. He continues that what will be interesting going forward is whether banks will decide to push for higher growth during the current period.
Lockhart-Ross notes that the philosophy at Nedbank Corporate Property Finance is to avoid pushing for market share growth in a rising interest rate cycle. The division takes an approach of balancing risks and reward through the economic cycle, which in its view, is the sustainable way.
“There are still pockets of opportunity in South Africa’s property market, particularly within certain segments of the market, and it is here that developers will see the best value in the short term.”
With Africa remaining key to the broader Nedbank group in 2014, Lockhart-Ross states that this view has also filtered through to Nedbank Corporate Property Finance. The bank intends to follow its 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 clients across sub-Saharan Africa.