Tougher times ahead
Global real estate slump far from over
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.