Market pressures expected to continue for 18-24 months

The impact of the global credit crisis on South African listed property companies’ access to finance has been minor, explains Managing Director of Nedbank Corporate Property Finance Frank Berkeley in a lead article in Property Loan Stock Association’s PLSA News – May edition.

“The sector has remained largely unaffected by the sub-prime problem and furthermore the country is also somewhat isolated from the rest of the world as a result of its exchange controls, which protects it to a degree,” explains Berkeley.

Nedbank Corporate Property Finance provides some R20 billion of commercial property finance each year. Its clients include leading listed property loan stocks Growthpoint Properties Limited, Resilient Property Income Fund, Diversified Property Fund, Pangbourne Properties, Acucap Properties and SA Corporate, amongst others. It also funds iconic property developments such as the R1 billion landmark Melrose Arch Piazza scheme in Jo’burg’s leafy northern suburbs and the R65 million Boulevard Square in Cape Town’s Century City. It is both funder and partner in the R530 million Mooi River Mall in Potchefstroom.

In the current market, traditional bank finance is trumping other methods of capital raising such as share-issues and securitisation. Currently out of favour, securitisation and other similar vehicles were effectively the cause of the subprime crisis – which stemmed from the securitising or packaging of lesser-quality home loans.

“This caused a huge number of problems in the banking and insurance industry,” notes Berkeley who explains that while, no doubt, securitisation will regain popularity over time there are not many who are keen to purchase this paper presently. In addition the former attractiveness of structured finance plunged in 2006 when Trevor Manual attacked the structures.

“Listed property companies remain good borrowers for banks with their low gearing – generally below 50% – and are still able to access funding,” says Berkeley. In fact, in April Nedbank Corporate Property Finance granted Growthpoint Properties Limited R2 billion in additional debt facilities, comprising an unsecured 5-year loan – the largest unsecured facility to be granted to a South African property company.

Listed property, notes Berkeley, has had a difficult few months in terms of share prices. “However, property is, and always has been, a long-term investment,” notes Berkeley.
The good news is that there are still opportunities in the current market.

Berkeley says: “A deal in which the fundamentals are strong, will remain a good deal no matter where the property cycle turns. There are certainly some great deals coming across our desks and managers of listed property funds should not be afraid to pursue a good deal with long-term benefits above market expectations about short-term distribution growth. After all, unlisted property companies, who do not have the same linked-unitholder pressures, have shown the fastest growth in the sector.”

The market pressures currently being experienced – nine consecutive interest rate hikes and the quick and severe turning of the property cycle – are likely to continue for another 18 to 24 months before the industry will find itself in a better space, believes Berkeley.

“South Africa’s seasoned property professionals have weathered worse. They know to plan at the top for the bottom and visa versa. It is the newer entrants to the property industry, those who have only been in the industry for some 5-years or less, who could be learning some very hard lessons in this climate,” he points out.

There are effectively two variables for property finance – pricing and period. Listed property companies by-and-large opt for fixed pricing as an interest rate hedge.

“Margins on finance are expected to increase across the board. The banking industry has been exceptionally competitive over recent years, cutting margins substantially. This era has come to an end. There has been a massive wake-up call in the banking industry world-wide and already overseas banks are no longer cutting margins and, in fact, rather increasing them,” notes Berkeley.

The Eskom electricity crisis issue is another factor which has come into play and Berkeley explains that any finance deal for a new development will only be considered once electricity is confirmed – a process which takes some four to six months longer than previously, but can be managed. This is also compounded by the slow zoning process that often takes years for the approval of new developments.

“This is a double-edged sword which is unfavourable for new developments, but exceptionally good for existing properties in this market where strong tenant demand exists,” says Berkeley.

He explains that in light of this, he is expecting to see an increase in revamps and ‘brownfields’ developments. “We can certainly expect a slowdown in the supply of new developments.”

Article from: www.rodneyhayter.com