The prolonged sluggish economic activity, both locally and globally, has had many an impact on local markets. When looking at transaction activity in the South African commercial market in line with this, the market appears buoyant. Property owners and stakeholders in the commercial property sector continue to seek investment opportunity as evidenced by the uptick in the listed commercial property companies, and the volume of transactions in the past few years.
In 2014, transactions in the commercial property space were valued at R105bn, a 9.7% increase from R96.5bn in 2013. As expected, the three metropolitan municipalities in Gauteng Province accounted for 57.7% of the total transaction activity with over R47.2bn worth of transfers.
Between 2012 and 2014, the share of listed commercial property transactions increased from 18.5% of the total market to 25%, signalling that listed commercial property companies are continuing to aggressively buy income-producing assets in order to increase their investments (as is evident in Figure 3). This is visible by the amount of excess supply the market has welcomed over the past years.
All three segments of the commercial property space (retail, offices and industrial) have seen increased development activity, especially in the office segment where development activity has been noticeable in Rosebank, Sandton, Waterfall and Bryanston, Cape Town City Centre, and Century City. A number of funds have been acquiring existing properties in non CBD areas for redevelopment and upgrading to better yielding assets in order to address tenant's demand for quality accommodation.
The industrial sector has also seen visible growth, particularly in the Waterfall estate area and the East Rand in Gauteng. Retail has also benefited somewhat from the township retail development activity by a number of funds looking to address the shortage of retail stock in previously disadvantaged townships.
Investors are attracted by the compressing yield in the sector, which according to SAPOA Discount and Capitalisation rate averages, have improved over the years to 9.50% in 2014 for the overall commercial property sector.
Transaction activity according to owner segments reveal that the majority of transactions are undertaken by the non-listed sector, although the listed sector is fast gaining momentum indicated by the share of ownership between 2012 and 2014. The listed sector's transaction activity grew by 42.5% in 2013 and 32% in 2014, surpassing the growth rate of the other owner segments.
Market share statistics show interesting trends in the sector. Nedbank remains a leader in the sector, with over R30,9 billion bonded properties during this period. Standard Bank and Investec trail behind the leader, with the latter having gained a significant position over this time. Whilst Absa, FNB and Standard bank are regarded as leaders in the overall banking sector, their commercial property lending position is lagging behind the fourth retail bank in the country.
Interestingly, Nedbank's average bond per transaction is somewhat lower than Standard bank and Investec, signalling that Nedbank could be lending in lower prized assets despite higher value compared to their competitors.
Simon Black, MD at Black Pepper Properties, envisages that this trend will continue where the smaller property funds and developers will battle to compete with the larger, established REIT's from a funding/gearing perspective.
"To reach expansion objectives, larger players in the property development space will elect to target existing portfolios rather than embarking on riskier speculative greenfield portfolio development. In terms of greenfield opportunities, Gauteng has a promising pipeline both from an office and industrial perspective. New, efficient buildings will put pressure on investors holding B Grade stock which may lead to churn in this sector of the market," explains Black.
"Commercial property investors and South Africans in general are facing a multitude of tough economic challenges including stifled GDP growth, credit downgrade risk, the energy crisis, a weak Rand, and inflationary numbers that will lead to an increasing increase interest rate cycle. These challenges may transfer strain onto smaller investors which may lead to the movement assets to larger competitors. Commercial property is still an attractive asset class locally however will require careful management to yield stable and sustainable returns," says Black.
It is evident that even in times of a sluggish economy, transaction activity seems to be unaffected, proving that property is a vital asset class in the economy. Transaction activity is likely to improve, and mainly be driven by the Listed real estate sector as they continue to look for good assets.
