Property sector looks to state projects amid economic slump
INFRASTRUCTURE development is key to support the property industry given South Africa’s weak economic growth, according to Robin Lockhart-Ross, who has been recently appointed the managing executive at Nedbank Corporate Property Finance.
Lockhart-Ross said growth in the commercial property industry over the next few years continued to be dependent on the government’s redress of critical infrastructure backlogs and capacity constraints to offset the dampening effects of low economic growth.
Apart from electricity supply shortages, more recent reports pointed to looming water supply issues that could further inhibit property development, he said.
But Lockhart-Ross said at municipal government level the heightened focus on and investment in expanding and improving transport infrastructure and promoting mixed-use activity nodes along major transport corridors and around key transport interchanges boded well for commercial property development within metropolitan areas.
“A greater degree of collaboration and co-ordination is becoming evident between the various central, provincial and municipal government departments and agencies, which all play roles in the approval, provision and funding of infrastructure that enables and facilitates private sector driven property developments,” he said.
Lockhart-Ross added that despite infrastructure backlogs and capacity constraints at national and municipal government levels, the commercial property market had proven remarkably resilient in recent years, which was a trend he expected to continue in the foreseeable future.
He said although growth in the property sector remained primarily a function of gross domestic product growth, which suggested that muted economic activity combined with rising interest rates could slow down the market next year, this had been an excellent year for Nedbank’s Corporate Property Finance division. The unit holds the largest market share in the local commercial property finance industry.
“We actually conclude some of our best property finance transactions when the economy is subdued,” he said. “Financial feasibility of a project is more critical amid heavy competition in tight economic conditions, and this is perhaps why developers braving the lean market reap great results when the economy recovers.”
Growth in the commercial property industry… continues to be dependent on the government’s redress of infrastructure backlogs and capacity constraints.
Lockhart-Ross said solid growth in loan demand was being seen in the retail property sector and was being driven largely by peri-urban and rural shopping centre developments catering for a growing emerging middle class population.
“Whereas usually only one or two major shopping centres break ground on South African soil annually, the past three years have seen a higher level of activity, with several large developments recently completed and in progress and several more projects being planned,” he said.
Lockhart-Ross said banks were far more considered now in their lending criteria given the lessons of recent history.
“The bulk of defaulted loans remain stalled residential developments that will have to be traded out over an extended period of time. The critical issue going forward is whether banks will opt to push for higher growth in their loan books at a time when it is inappropriate to do so.
“Our ethos at Nedbank Corporate Property Finance is to avoid chasing market share growth in a rising interest rate cycle and rather to follow a sustainable approach that balances risk and reward through the economic cycle. This is a philosophy that we continue to apply,” he said.
Lockhart-Ross added that the perceived riskier environment, coupled with the new Basel banking regulations, had also led to a trend within the commercial property finance space towards shorter loan periods.
“Typically a loan used to be for a 10-year period. However, the banks’ cost of capital and liquidity has increased, so banks have begun charging liquidity premiums, which vary according to the term of a loan and has prompted the move towards shortening of loan terms,” he said.
Lockhart-Ross said Nedbank Corporate Property Finance had passed an important milestone this year in reaching a loan book of R100 billion, which was a long standing goal for the division following the market downturn that began in 2008/9. He added that it was particularly gratifying this target was achieved a year ahead of schedule.
He said although there continued to be attractive funding opportunities locally, there was also a clear intent to diversify into Africa over the next few years in light of the current economic environment and Nedbank’s market leading position.
“This will be achieved through a two-pronged approach of following our South African clients into selected jurisdictions, as well as leveraging the existing presence of Nedbank’s African subsidiaries, plus its alliances with Ecobank and Banco Unco to provide a premium service to our clients across subSaharan Africa,” he said.