Commercial property growth dependent on government’s redress of critical infrastructure backlogs and capacity constraints

GROWTH IN South Africa’s commercial property industry during the next few years continues to be dependent on government’s redress of critical infrastructure backlogs and capacity constraints to offset the dampening effects of low economic growth.

Aside from ongoing electricity supply shortages, more recent reports point to looming water supply issues that could further inhibit property development, says Robin LockhartRo s s , who wa s r e c e n t l y appointed managing executive at Nedbank Corporate Property Finance.

“However, at municipal government level, the heightened focus on and investment in expanding and i mproving transport infrastructure and promoting mixed-use activity nodes along major transport corridors and around key transport interchanges bodes 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 says that, in spite of infrastructure backlogs and capacity constraints at national and municipal government levels, the SA commercial property market has p r oved t o b e r e markably resilient within recent years – a trend he expects to continue in the foreseeable future.

“Although growth in the property sector remains primarily a f unction of GDP growth, which suggests that muted economic activity combined with rising interest rates could slow down the market next year, 2014 has been an excellent year for Nedbank’s corporate property finance division.

“We actually conclude some of our best property finance transactions when the economy is subdued,” says Lockhart-Ross. “Financial feasibility of a project is even 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.”

Lockhart- Ross says that solid growth in loan demand is being seen in the retail property sector, driven in the main 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 SA soil annually, there has been a higher level of activity during the past three years, with several large developments recently completed and in progress, and seve r a l more p r o j e c t s b e i ng planned.

“Banks are 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 in future 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, but rather to follow a sustainable approach that balances risk and reward through the economic cycle, and this is a philosophy that we continue to apply,” says Lockhart-Ross.

He s ay s t h e p e r c e i ve d riskier environment and the new and evolving Basel regulations have also led to a trend in commercial property finance towards shorter loan periods. Typically, a loan used to be for 10 years, but the banks’ cost of c apit al and l i quidity has increased, so banks have begun charging liquidity premiums which vary according to the term of a loan. This has prompted the move towards shortening of loan terms.

Lockhart-Ross says that during 2014, Nedbank Corporate Property Finance passed an important milestone, reaching a loan book of R100 billion, a long time goal for the division following the market downturn that began in 2008/9.

“It was particularly gratifyi n g t h a t t h i s t a r g e t was achieved a year ahead of schedule. Although there continue to be attractive funding opportunities locally, there is also a clear intent to diversify into Africa over the next few years. This will be achieved through a two-pronged approach of following our SA 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 service our clients across subSaharan Africa,” says Lockhart-Ross.

NEW FACILITY: An artist’s impression of the new medical facility under construction at Century City, which is being partially funded by Nedbank Corporate Property Finance.