Tougher times ahead

Global real es­tate slump far from over

Finweek English Edition - - Property - JOAN MULLER joanm@fin­

THE 25% DROP in del­e­gates at­tend­ing the SA Prop­erty Own­ers’ As­so­ci­a­tion’s an­nual con­ven­tion in Dur­ban ear­lier this month re­futed any sug­ges­tion South Africa’s com­mer­cial prop­erty mar­ket has es­caped the global real es­tate fall­out un­scathed.

The 2009 event, tra­di­tion­ally a key gath­er­ing for the in­dus­try’s movers and shak­ers, at­tracted 834 del­e­gates – 300 less than last year. True, the SA com­mer­cial prop­erty mar­ket has yet to ex­pe­ri­ence the same level of value de­struc­tion seen in many other coun­tries world­wide. And un­like their coun­ter­parts off­shore, SA’s com­mer­cial mort­gage lenders still ap­pear to be open for busi­ness. But the in­dus­try in SA is clearly cut­ting back on ex­penses as lo­cal de­vel­op­ers, prop­erty own­ers and man­agers start con­tem­plat­ing the spec­tre of ris­ing va­can­cies and fall­ing rents in their own back yards.

A key sen­ti­ment echoed by speak­ers at this year’s Sapoa con­ven­tion was that com­mer­cial prop­erty play­ers shouldn’t un­der­es­ti­mate the im­pact an eco­nomic re­ces­sion is likely to still have on de­mand for re­tail, of­fice and in­dus­trial space in the months ahead.

“We’re only start­ing to see busi­ness fail­ures hap­pen. Prop­erty own­ers have not yet felt the full im­pact of neg­a­tive eco­nomic growth,’’ said Brian Azizollahoff, CEO of JSE-listed prop­erty fund Rede­fine.

Nor­bert Sasse, CEO of JSE-listed fund Growth­point Prop­er­ties, agreed SA is lag­ging the global down­turn by six to 12 months. “There’s no doubt tougher times lie ahead, with a re­cov­ery un­likely be­fore end-2010 or early 2011.” But Sasse says SA’s com­mer­cial prop­erty down­turn won’t be as se­vere as that in many de­vel­oped coun­tries. “Our in­dus­try should be buffered by the fact that we’ve been more con­ser­va­tive in terms of gear­ing and val­u­a­tions.”

Sasse said SA’s com­mer­cial prop­erty mar­ket has also not been that ex­posed to com­mer­cial mort­gage backed se­cu­rity (CMBS) prod­ucts, which has cre­ated much fi­nan­cial risk in de­vel­oped mar­kets.

John Cush­man, one of the con­ven­tion’s in­ter­na­tional speak­ers and chair­man of US-based prop­erty broking firm Cush­man & Wake­field, warned any talk of a quick re­cov­ery in global prop­erty mar­kets was based on “mis­placed op­ti­mism”. He re­ferred to the re­cent rally in US and other off­shore listed real es­tate as un­sus­tain­able. “The global com­mer­cial prop­erty mar­ket is in for more pain as un­em­ploy­ment keeps ris­ing.”

Cush­man said it’s likely va­can­cies will con­tinue to climb and rents con­tinue to plum­met in many parts of the world, de­spite mar­kets such as the US, Bri­tain, Aus­tralia and Asia al­ready ex­pe­ri­enc­ing prop­erty value de­clines of be­tween 30% and 70%. “Emerg­ing mar­kets in par­tic­u­lar are still not near the bot­tom, as the im­pact of new com­mer­cial prop­erty sup­ply com­ing on stream still has to be felt.”

Cush­man cau­tioned in­vestors not to rush into op­por­tunis­tic funds looking to cash in on cheap buy­ing op­por­tu­ni­ties in the US, Bri­tain, Asia and else­where. “Mar­kets are so chal­leng­ing at the mo­ment that no one can see the bot­tom. A lot of those funds are buy­ing into real es­tate too early and will burn their fin­gers.”

Cush­man said even when the world econ­omy turns, prop­erty mar­kets wouldn’t mimic that re­cov­ery quickly, as the prop­erty cy­cle gen­er­ally lags the eco­nomic cy­cle.

Mean­while, the lat­est IPD global prop­erty in­dex re­leased last week con­firms SA was the world’s best per­form­ing com­mer­cial prop­erty mar­ket in 2008 in terms of to­tal re­turns. IPD tracks the in­vest­ment per­for­mance of com­mer­cial prop­erty in 23 coun­tries. Re­turns in lo­cal cur­rency ranged be­tween SA’s high of 13% to Ire­land’s low of -34,2% (see ta­ble).

Ian Cullen, IPD’s co-found­ing di­rec­tor, says in a year marked by a glob­ally syn­chro­nised eco­nomic re­ces­sion, it’s not sur­pris­ing IPD’s in­dex breaks records in the scale of cor­rec­tion in in­vest­ment prop­erty prices.

He says for cross-bor­der real es­tate in­vestors the most cru­cial fac­tor driv­ing over­all re­turns last year was the dra­matic move­ments in cur­rency ex­change rates. For ex­am­ple, given sig­nif­i­cantly weak­ened ster­ling against both the euro and US dol­lar last year Bri­tain over­took Ire­land as the weak­est na­tional mar­ket on a US dol­lar re­turn ba­sis at -43,7%. Ja­pan was the strong­est mar­ket in dol­lar terms, with a to­tal re­turn of 24%.

It will be in­ter­est­ing to see if SA will be able to re­tain its lead in the IPD per­for­mance stakes this year.

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