Friday, 10 December 2010

UK commercial property an investment for South Africans

The continued recovery of the UK commercial property market, coupled with the strengthening of the rand relative to pound sterling, has presented South African investors with a unique opportunity to invest in the UK while capitalising on the recovery cycle.

This is according to Eric Mounier, CEO of the Pam Golding Properties/Athanor International Property Investments joint venture which markets direct offshore commercial property investments.

"Since 2000, the joint venture has been involved in property asset transactions valued at over R5 billion and currently is involved in supporting over 40 active property investments,he said.

Despite commercial property values in the UK being devalued by over 40 percent following the global credit crisis, the asset management team has been successful in ensuring all properties under management remain operational and income producing, and favourably positioned to take advantage of the expected recovery cycle.

Illustrating the UK commercial property market's recovery is the Investment Property Databank (IPD) UK monthly index, which indicated a 0.1% growth in un-geared commercial property values for the month of October 2010.

This growth concluded the 15th consecutive month of capital appreciation, bringing the compounded upturn in values since the recovery to 15.9%, according to the IPD.
While there had been significant growth during this period there was still a long way to go to get back to the values prior to the global credit crisis.

"This trend is supportive of the market commentary which indicates that investors are starting to re-enter the market, with the UK providing a popular investment destination.

During the period of downturn following the global credit crunch, the UK experienced a significant re-pricing of commercial property values, and as a result investors were taking advantage of the favourable prices which were now possible.

In addition, during the past year we have seen a significant strengthening of the rand against the pound with a slight reversal of this trend more recently, Mounier said.

For those taking the view that the pound was likely to remain strong against the rand and the euro, the timing seemed opportune to invest in a solid pound-related asset class, he added.

The aim of the Athanor/PGP JV is to facilitate property investments which derive the vast majority of their returns from the large net yields currently available as a result of the positive gap between the rental income and the cost of finance. "

Consequently, less dependence was placed on capital growth to achieve the expected return which reduced the risk associated with these investments.

As an example of such an investment, a recently launched property in Parkhouse West Industrial Estate in Newcastle-under-Lyme in Staffordshire, England, is expected to produce cash flow of around 11 percent per annum, from which a portion will be used to pay down the bank loan and the remainder available to return to investors.

The majority of the projected return will come from the annual cash flow," he said.

SA property falls in global rankings

The rapid deceleration in house price growth in recent months has seen South Africa slip markedly in the global performance rankings.

UK-based Knight Frank’s latest Global House Price Index shows that South Africa ended the third quarter of 2010 in 22nd place, down from 6th position in the second quarter.

UK-based Knight Frank’s latest Global House Price Index released earlier this week shows that South Africa ended the third quarter of 2010 in 22nd place, down from 6th position in the second quarter. Knight Frank tracks price movements in 48 countries across the world.

According to the latest index, South Africa managed house price growth of an average 3% in the third quarter. That is significantly down from the 14,8% recorded in the second quarter (year-on-year).

However, it’s not only South Africa where the housing recovery has lost steam. Liam Bailey, head of residential research at Knight Frank, says a number of countries have even tipped back into negative growth in the past three months. A total of 14 mainly European countries saw negative growth in the third quarter after they had experienced several quarters of rising prices.

Bailey says there is a growing gap between the less debt-afflicted European economies of Austria, France and Finland who rank in the top 10 and their neighbours to the south and west of the continent like Greece, Spain and Ireland who rank in the bottom 10.

The world’s top performing housing market in the third quarter was Latvia in Eastern Europe with growth of 26,1%. Ireland ended the third quarter at the bottom of Knight Frank’s global house price rankings with negative growth of -14,8%. The report shows that in Dublin declines of up to 50% have been recorded over the past two years.

Bailey says although there is some good news in that for the first time since late 2008 prices are rising in each of the six world regions -- Asia-Pacific is up 9,9%, the Middle East 5,1%, North America 4,2%, South America 3,5%, Africa 3% and Europe 0,8% -- the headlines don’t tell the full story.

Says Bailey: “Digging into the data we can see that there are still considerable issues playing out across global housing markets. While a majority of countries are reporting positive annual growth, 56% saw prices fall in the third quarter of this year.”

Bailey notes there is growing evidence that the global housing recovery, which began in early 2009 following desperate conditions in 2007 and 2008, may just be beginning to run out of steam. Nearly 30% of countries that experienced strengthening conditions in early 2010 saw quarterly price growth turn negative in the third quarter. - Joan Muller

Friday, 3 December 2010

Property Predictions for 2011 - South Africa

In 2011 the greatest challenge for the auction industry will be to refocus on a buyer's market still constrained with a shortage of demand and an over supply of non-income producing properties.

As the country gets used to a long, hard and bumpy recovery, the economic headwinds will still be strong and unemployment rates alarmingly high.

While the lowest interest rates in 30 years will boost sentiment and cause a bounce in properties with reliable cash flow, the favourable interest rate environment won't be a magic pill which quickly relieves the downturn.

Finding the right buyers at auctions and getting funding will remain challenging.

Business confidence will be dependent on a host of local and international issues; including fears of a potential sovereign debt crisis in Europe.

While distress at retail level may slow with lower interest rates, and banks now well geared up to assist defaulting clients, corporate distress will grow with larger liquidations bringing higher value assets to the auction floor.

High value bankruptcies will increase throughout the year, presenting opportunistic purchasing like never before seen in South Africa.

As liquidators and banks get more desperate to offload bad debts and an oversupply of development land, a sweet spot will emerge for investors with access to financing as they pick up these assets at bargain prices.

The residential property market will remain flat for most of the year with a stronger recovery at entry level. Investors will snap up properties below R1 million, which for the first time in many years will provide stronger returns than cash in the bank.

The middle market will remain flat for some time as it deals with oversupply in newer residential areas.

The luxury residential market across the country will remain weak all year, with little help from interest rates, and a strong Rand constraining international demand.

Leisure residential properties at the coast, on golf courses and in other non-urban areas will also remain flat with many properties being sold at auction below replacement value.

Next year two pieces of legislation may have a major impact on the auction sector. The Consumer Protection Act will change a wide range of issues regarding the auction process, mandates and sales processes; these are all designed to look after the consumer's interests.

The new Companies Act will also have a material effect with the introduction of Business Recovery.

This may cause an initial slowdown in liquidations as companies go through the business recovery process.

It is possible that liquidations may increase later in the year as banks rush to secure their positions on property exposures. Either way, it will have a material impact on the auction sector.

The commercial property market will become two-tiered; good properties with strong covenants and reliable cash flow will experience a surge in demand as investors look to place their cash in areas that achieve greater returns than bank deposits.

Blocks of flats, retail property and key industrial sites will form the strongest part of the market.

The office market will remain mild but A-Grade properties in prime locations will attract strong demand on the auction floor.

An area of concern will be hotels, guest houses and leisure resorts which will battle in 2011 and may hit the auction floor with little demand.

Foreign buyers now few and far between.....

There was a time two or more years ago when residential property estate agencies, some with international connections, earned considerable kudos by publicising impressive figures on the number of foreign buyers to whom they had sold South African property.

That time, says Bill Rawson, Chairman of the fast expanding South African property group that carries his name, is now by and large past.

"At present I regret to say we are just not seeing foreign buyers in territories like the Western and Southern Cape where their presence previously - and their ability to buy in the more expensive brackets - very definitely did help to keep prices up."

Sales of upper bracket homes, adds Rawson, have been the hardest hit by the recession and the lack of overseas buyers here has been felt in this sector to a far greater degree than elsewhere.

In the circumstances, he says, the government's investigation some years back into the impact of foreign buying had become almost irrelevant today.

"Those who have had to sell in the upper brackets have been forced to accept fairly drastic price cuts," says Rawson. "For example, a seven bedroom Constantia home originally on the market at R17 million was knocked down recently on auction for R10 million.

"However, it is also true that in this market there are relatively few distressed sellers and those planning to sell are often able to sit back and wait for better times. Prices in areas like Constantia have, therefore, remained fairly satisfactory."

Buyers in South Africa who are not adopting a wait and see attitude (as some are), says Rawson, are currently getting exceptionally good prices - for which, he is convinced, they will later be grateful.

"This applies particularly, I think, to those buying currently in Rawson Properties' three “academic belt” (Rondebosch) multi-unit projects - Rivers Edge, Rondebosch Oaks and The Rondebosch. Buyers here are taking up units at the same pace we saw in the boom years."

Investors, says Rawson, have in recent months been able to arrange bank finance far more easily and at better rates than was possible earlier this year - "and it looks if the trend will continue".

Commending Dr Andrew Golding and his research team at Pam Golding Properties, Rawson says that their publication of the best areas in which to invest is "exactly the sort of information buyers and the whole industry needs. It will very definitely facilitate investor decision making".

The report, says Rawson, once again shows the importance of close proximity to good schools and efficient transport systems as well as upper bracket retail areas. It also emphasises the absolute necessity of increased security for private homes.

A further finding of the report, which, says Rawson, is particularly important and which has reinforced the long-held convictions of many Capetonians, is that the Southern Suburbs of Cape Town have been and are likely to remain the safest and steadiest appreciating place in SA to make a long term property investment.