Advice and Opinion

Commercial property sector still has room for growth

Despite the bleak economic outlook, the South African commercial property sector continues to prove its resilience with positive growth in the residential rental accommodation market, followed closely by retail developments in townships and owner-occupied commercial properties.

Rural retail development

Attie Anderson, Head of Commercial Property Finance for FNB, says the growing middleclass has led to a constant inflow of new residents from townships or informal areas into larger towns and cities, driving demand for residential rental accommodation. This in turn drives demand from residential rental accommodation to retail spaces in these towns and cities, which has a positive cascade effect on other property sectors.

However, it is important for these areas to have a diversification of industries driving the local economy in order to weather the economic storm. For example, a town can be heavily impacted when commodity prices drop, if its economy relies on the mining of only one or two minerals.

“Rural retail development has the potential to bring convenient shopping to the masses, given that the rural market still remains largely underserviced. Shoppers in these areas are often not affected by the current economic climate, as the majority of money spent on a monthly basis is cash, either from government grants or family members working in larger towns and cities,” says Anderson.

Therefore, the interest rate and economic growth rate does not affect shopping patterns other than the ongoing increases in consumables.

He says local communities will further benefit from the creation of local employment, not only during construction phase, but also in the ongoing operations of the retail sector. However, the fact that most of the land in these areas is either leasehold or tribal land continues to be a challenge.

Other opportunities

Rental stock offers good returns as urbanization increases and access to finance for consumers becomes more difficult due to higher living cost, higher interest rates and reduced annual salary increases.

Challenges in the economy will lead to opportunities in the property sector as some investors’ circumstances change and they are forced to liquidate assets. Investors should be on the lookout for properties in distress, which could be acquired at a reasonable price that would otherwise not have been taken to the market. When opportunities arise, investors should move quickly and leverage on their existing property portfolios to raise funds.

Moreover, the transport sector and proximity to transport hubs will have a massive influence on the property sector going forward. Many investors are already taking up opportunities close to these hubs. As a result, well located properties offering good operating premises continue to be popular as they are able to secure tenants nationally.

Anderson says business owners buying or building their own premises to trade from, also remain an active part of the property sector, confirming that property investment in the right location is key.

Conclusion

Investors continue to look for opportunities that are likely to deliver sustainable escalating cash flow over an extended period of time. This is influenced by sought after locations, quality and age of the property, and flexibility of the property to accommodate various tenants (i.e. non specialised property).

Anderson, however, cautions that investors should avoid taking unnecessary risks by ensuring that properties are appropriately geared given the current market conditions. Furthermore, they must also ensure that adequate buffers for unforeseen events exist, like a spike in interest rates or a tenant vacating unexpectedly.