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Investment drop ‘no surprise’

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SA commercial property hits seven-year low

A technical recession and low investor confidence has produced a seven-year investment low in the South African commercial property market.
This saw a decline of more than 50% last year in overall capital invested.

The 2017 Investment Review of the South African property market, conducted by JLL, shows that overall capital investment, excluding new developments, amounted to R28.7billion in 2016, dropping to R13.3bn last year.

But this has not come as a surprise.

“The real estate sector was not immune to low levels of investor confidence going into 2017, made worse by the declaration of a technical recession in the first quarter of 2017 This set the tone for benign investment activity in the remainder of the year,” the report states.

The three crucial elements that explain this contraction are:

Decline in portfolio transactions last year.

Ongoing confidence in developer activity.

A growing interest in both non-traditional and/or foreign assets.

Regarding portfolio transaction decline, JLL says large portfolio sales saw investment growth increasing by more than 53% year-on-year in 2015 and a further 35% year-on-year in 2016. Because this reversed in 2017, with investment value declining by 53.9% year-on-year, the slowdown in investment activity was exaggerated by comparison.

The confidence in new developments is also bringing into question the long-term value of existing assets in the current economic climate.

“In addition to the completions made in 2017, the national office development pipeline is estimated at 690000m². Similar trends are visible in the retail and industrial sectors. Hence the options for capital within the real estate market remain broad, increasing competition for the secondary market.”

Non-traditional and foreign assets are also seeing interest diverting, as real estate investment trusts, that traditionally play in the office, industrial and retail spaces, showed greater interest in student housing, residential accommodation and hotels in 2017. JLL says it is also worth nothing several local real estate investment trusts invested in or looked at opportunities abroad.

Reflecting on the report, Erwin Rode of Rode & Associates says it is well known that a price boom in real estate results in a boom in the number of transactions. One would have hoped investors invest counter-cyclically, but this is “evidently not so”, possibly because the smart investors are in the minority.

“This has an important implication for the fees of professionals linked to the property industry, including conveyancers and real estate agents.”

JLL says the election of President Cyril Ramaphosa has renewed investor confidence. However, “it is incorrect to assume that the change in investor sentiment will be enough to swing sentiment in the local real estate market”.

The report predicts:

Portfolio deals for companies with distressed balance sheets are likely to reduce as the economic outlook improves.

Waiting for completion of new developments may delay investor decisions.

Asset type and geographical diversification could reduce demand for traditional investments.

But, although not evident in the numbers, JLL says commercial real estate remains a “solid option” for investors, and 2018 is expected to show improvement on 2017.

Growth may, however, not be as dramatic as it has been.

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