2009 Make or Break for SA Commercial Property Values
| During the initial stages of the current global financial
crisis, South Africans thought that they would get through this period relatively
Unfortunately, as time ticks on and the true reality of the severity of the downturn hits home, commercial property owners in South Africa are seeing significant downward pressure on commercial property values.
The crisis in the financial services sector has led to a loss of liquidity in the commercial property sector. Banking is a global business and many SA based banks have seen reactions to global banking pressures spill over south of the equator.
There is no doubt that Barclays Bank has put the brakes on ABSAs commercial lending business in SA. Likewise property lending divisions at most banks have had their wings clipped. This has subsequently led to a dramatic fall in the number and size of transactions and is busy contributing to the acceleration of the decline in property values.
The loss of liquidity in the residential market, in the form of home mortgages and other lending, has also had a severe impact on consumer spending. This in turn, has had a knock-on effect on retailers and retail property, but will ultimately affect all sectors of the market.
We have now entered a new phase that where the global recession starts to hit occupiers. Rising unemployment and falling consumer spending will cause businesses to fail. Most countries have reduced interest rates to try to assist in reducing the pain, but South Africa still has extremely high interest rates and even if they do come down steadily during the year, it may be too late for many businesses and consumers.
Internationally, most property market benchmarks are calculated monthly and hence property market data gets publicized earlier than in SA, where many benchmarks are annual and often take months before they reach the public eye. Recent statistics in SA are showing signs of cracks with the latest SAPOA Office Survey having recorded the first negative rental space take-up in Johannesburg in many years.
While this on its own may not be serious, it does have major implications for rental growth which has been the main driver of optimistic valuations of commercial property. When investors finally realize they cannot achieve the rental levels they had anticipated, this has a negative multiplier effect on commercial property values.
Westfield Group (One of the largest owners of shopping centres in a variety of countries) has recently written down their property values by USD3bn (R31bn), thus dragging certain property benchmarks down to 1986 levels.
In South Africa, JSE listed Property companies have started to report lower property values (on various properties) in their financial statements, but the full impact on the entire market is likely to only be felt over a period of two years due to the gradual release of property results through a number of channels. The IPD index, which is seen by many as the most credible track of commercial values in SA, is based on historical information, which takes time before it is released in a meaningful form.
Owners of commercial property in South Africa need to be realistic when valuing their properties in 2009. In many cases it may be better to take the pain of a lower valuation earlier than later. SA is part of the global economy and as such will take part in the painful process of reduced commercial property values, hopefully to a lesser degree than the developed economies.
Article by: Property investment specialist, Tony Bales - www.balesdelaporte.co.za