Real Estate News - Market bristling with foreign interest

FOREIGN interest in the South African property market has increased at least 10 times since the sale of the Victoria & Alfred (V&A) Waterfront in Cape town to a foreign consortium for $1bn, says Mike Flax, executive director of listed property asset managers Madison.

He says the V&A sale, to a joint venture of Dubai-based Istithmar and UK-based London & Regional Properties, is just the beginning of foreign investor interest in SA and will also boost tourism.

The V&A deal, the first foreign property deal of any significant substance, was a signal for the rest of the world that “they had better look at SA”.

Since the deal was announced in September last year, property players such as Cadillac Fairview, one of Canada’s biggest landlords and developers, have started investigating SA’s market.

Flax says firms such as London & Regional are also looking to open offices in SA because they see Africa in the same light as eastern Europe in terms of opportunity.

UK-based Hendersons Global, a property fund manager and one of the most influential players in the listed real estate market, has visited SA and is developing an interest and appetite for local listed property stocks.

Flax says the V&A sale introduces other world-class developers to the market, which should also raise the standard of innovation.

This will probably lower the capitalisation rates and hence the cost of finance for developments in SA as a result of increased competition, he says.

“The lower cost of capital will make developments viable. You will probably see a flood of speculative developments in residential, offices or retail and hotels over the next five years driven by international players with a larger stomach for risk.

“The big question is can the economy absorb a spate of speculative development and the bottom line is whether we can grow our economy at 5% to 6% levels.”

Flax also expects an increase in professionalism among property agents and developers.

“With the foreign firms come top-quality international retailers like Gap, who have already expressed interest in SA. It’s more choice for the shopper and should also feed the industrial warehouse market.”

Flax says international tourists will also follow well-known developers.

“You will see a lot more people from the Middle East coming to the (V&A) Waterfront. Foreign developers will unlock new tourism markets for SA. They will market their hotels to their home bases.”

Property economist Erwin Rode, of Rode & Associates, says his “fear is that government still hasn’t finalised its policy on foreign property ownership in SA”.

“I’ll be surprised if foreigners were to tumble in before this policy was finalised,” says Rode.

Property economist Francois Viruly, of Viruly Consulting, says that “what is becoming of interest in the property market is that at a time when foreign investors are beginning to look at the South African market, many local investors are searching for opportunities outside of the country”.

“The biggest issue is the lack of investment opportunities in the property market at the moment, which means an investor who is coming to look at direct properties in SA will come under enormous pressure to actually develop because the stock is just not around,” says Viruly.

“The yields on the listed property sector of 7% and below means that we will need to show some hefty capital growth for returns to be attractive to foreign investors, especially because foreign investors are seeing rates of return in Asia, for instance, which are twice SA’s performance.

“If we are going to attract investors here we are going to have to show international competitive returns.”

Article by: Nick Wilson - www.businessday.co.za