Pressure on local commercial property

Downward pressure on South Africa’s gross domestic product will place the commercial property sector under pressure for the rest of this year, according to property services company Broll Property Group’s annual report on the sector.

However, Malcolm Horne, the chief executive of Broll, which is a member of the global CBRE Affiliate Network, said investors were recognising that the time to re-enter the property investment sector was starting to look promising, although securing finance from banks was likely to remain a constraint.

This view is supported by the latest research report by New York-listed global commercial property firm Jones Lang LaSalle on commercial property activity in South Africa, which among other things found that there was a shortage of quality assets for sale in the investment market because matured funds were holding onto prime assets.

“Investors who are already holders of prime investments will find little incentive for disposal as replacement stock is very thin,” said Jones Lang LaSalle, which entered the South African market in 2011 through the acquisition of local corporate property service provider Bradford McCormack & Associates (BMA).

Horne said the latest Broll property report showed the outlook for an upturn in world economic growth was brighter than last year but many of South Africa’s overseas trading partners were experiencing little or no economic growth, especially the euro zone, while the global economy remained sluggish.

“The research in the Broll property report shows that landlords are likely to face a difficult year as they cope with rising costs on one hand, and an income squeeze on the other. This is exacerbated by economic conditions as well as the trend among tenants towards more efficient space use,” he said.

This view was also highlighted by Jones Lang LaSalle, which said successful investment in office, retail and industrial properties as an asset class was reliant on location, build quality and design and the ability to attract a sustainable rental income.

Jones Lang LaSalle stressed that it was becoming increasingly apparent that tenants were prepared to pay a premium for efficient buildings in prime locations and investments in these types of properties continued to be robust compared with secondary markets.

However, Jones Lang LaSalle said it remained to be seen what the impact of the anticipated increases in municipal charges and operating consumables would have on the property sector because “tenants will offer strong resistance to incremental rental increases given the prevailing state of our economy”.

“This predicted downward pressure on achievable rentals is likely to have a greater impact on secondary rather than prime properties,” it said.

Jones Lang LaSalle said there was a prevalence of monopolistic ownership by matured listed funds, which continued to buy and hold all good buildings in prime areas.

It said the gap between the prime and secondary market was likely to widen further as prime stock continued to be highly sought after but limited options were available.

“This will result in prime properties becoming more expensive, thus compressing yields further,” it said.

Horne said the Broll report revealed a continued slowdown for retail property.

“The pressures from a persistent downward trend in real disposable income growth, weak consumer confidence and job losses are all likely to continue for the rest of 2013,” he said.

Horne added that with inflation set to stay at the upper levels of the Reserve Bank’s 3 percent to 6 percent target range, the government was likely to curb growth in its wage bill and also expected to contain the growth in spending because of reduced growth in tax revenue.

“Forecasts suggest slightly slower growth in household consumption spending in 2013 and durable goods sales are likely to suffer,” he said.

Horne added that the outlook for industrial property was closely influenced by the manufacturing and mining sectors and the prognosis was for another year of lacklustre performance in these sectors.

Horne said soft demand for offices would continue this year, except for popular niche nodes, such as the Sandton central business district.

“Downward pressure on rentals and increasing operating costs continue to challenge the [office] sector,” he said.

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