Commercial property finance market is still going strong

THE LOCAL commercial property finance market remained remarkably buoyant and was continuing the strong trend seen over the past few years despite being constrained by poor gross domestic product (GDP) growth, rising operating costs and low business confidence in the first half of this year.

Robin Lockhart-Ross, the managing executive of property finance at Nedbank Corporate and Investment Banking (NCIB), said the improvement in the - quality of its loan book had been a notable trend for property finance since the global financial crisis in 2008.

“Four or five years ago 3.5 percent of our total commercial property finance book was problematic. That number is now less than 1.25 percent.

“This is a low ratio by bank standards, where anything below 2 percent is acceptable. Our credit loss ratio (bad debt as a function of the total book), which is usually between 0.2 percent and 0.4 percent is currently less than 0.2 percent,” he said.

Lockhart-Ross said most of their competitors were experiencing similar trends.

Prospects

He said property finance at NCIB had consistently performed in recent years and its book stood at an estimated R119 billion at the end August, which was a significant achievement given the current economic environment.

However, Lockhart-Ross warned of some headwinds facing the commercial property finance market.

He said the upcoming implementation of Basel III capital and liquidity requirements was set to present some challenges that would make it increasingly difficult and costly for banks to lend on a longer-term basis.

Lockhart-Ross said this might result in non-bank lenders increasing their presence in the property finance market because they would not be subject to the same strict requirements under Basel III regulations, he said.

Turning to the anticipated performance of the property market this year and beyond, Lockhart-Ross said the listed property sector had seen a high level of activity, with most of the big players looking to increase the size of their portfolios.

For example, Growthpoint recently acquired Acucap Properties and Sycom Property Fund, while Redefine took a 66 percent stake in Fountainhead and acquired the unlisted Leaf Properties portfolio. “Finding quality stock at realistic values is difficult, which has seen bigger funds acquire and consolidate smaller funds,” he said.

However, the upcoming implementation of Basel III requirements was set to present some challenges…

Lockhart-Ross said listed property funds represented the safest prospect from both an investor’s and a lender’s perspective despite the market having entered a rising interest rate cycle in South Africa; they were well managed, well diversified and well hedged.

He said bankers were most concerned about the office market, particularly in certain locations where there was existing or looming oversupply.

Lockhart-Ross said banks were cautious about funding new office developments unless they were supported by a strong tenant on a long lease or were being undertaken by a listed fund or substantial developer with a strong balance sheet.

The consolidation of offices by the big corporates in mega- head office campuses in key nodes, with the subsequent negative impact this had of increasing the level of vacant space in surrounding or secondary nodes, was another contributing factor to the concern surrounding the office market, he said.

Lockhart-Ross said the industrial property market had experienced positive growth over the last few years, largely because of the drive for efficiency and scale in logistics and distribution among retailers.

“The market has also been fuelled by other balance sheet transactions, such as the recent sale and leaseback deals by major industrialists, such as Macsteel and Aveng, which were looking to refinance their owner-occupied property portfolios,” he said.

But Lockhart-Ross said overall there was not a significant amount of new building development taking place in the industrial sector despite the substantial development activity by Attacq in the Waterfall node.

Sense of caution

Lockhart-Ross said there was a “sense of caution” among bankers around retail property.

He said a number of major shopping centres had recently come on stream or were coming on stream, such as Newtown Junction in Johannesburg’s CBD, Forest Hill in Centurion, Bay West in Port Elizabeth and Mall of Africa in Midrand.

But Lockhart-Ross said the reality was that very few opportunities for mega-retail projects remained apart from selective opportunities in niche retail centres.

He said the residential sector was “encouraging”.

Lockhart-Ross said the development of student accommodation was also attracting more entrants and gaining more traction, especially in traditional university towns, with the likelihood of a student accommodation fund coming to market soon.