Private investors weigh options

MORE property is coming onto the market as smaller private investors become willing sellers. These investors bought commercial properties when interest rates were lower, but are now feeling the “squeeze”, say some market commentators.

By contrast, the listed property sector is largely unaffected by the increase in interest rates and is thus able to support the prices achieved in the past year.

As a result institutional investors are still steaming ahead with stiff competition among the various players for limited quality property stock.

While the larger commercial properties are still experiencing sustained price growth, smaller, lower-profile investment commercial property market is being held back by high interest rates, which could start to be reflected in price reductions.

Ron van der Bos, a director of property asset management at Bridge Capital, says this willing seller trend is creating opportunities for new market entrants with different funding criteria.

Van der Bos says companies such as Bridge Capital are getting “better bargains” for property stock in the market.

“Because of the booming performance of commercial property, many smaller private investors bought investment commercial property. With interest rate increases their borrowing affordability has now diminished. The smaller players who cannot afford their borrowings are now looking to exit the market by selling their properties,” he says.

Van der Bos says the higher interest rate environment will not really affect the listed property sector — it is less reliant on short-term interest rates for funding.

Tom Bate, a partner at valuation firm Mills Fitchet, says the result is dual capitalisation rates have evolved during the past six months. “One is determined by institutions and listed property and the other by private property players who rely heavily on finance,” he says.

“The net rental growth in the past year has ranged between 6% and 10%, significantly lower than the increasing cost of money that has gone up by about 30%.

“The serviceability of these bonds has resulted in a serious squeeze for some and an increased flow of property on the market after a period when stock has been very hard to come by.

“The question for many smaller investors now is how long the higher interest-rate cycle will remain,” Bate says. There is a 12-month “window period” for new market entrants to pick up smaller investment properties at less costly prices, Van der Bos says.

Evan Robins, property analyst at Nedcor Securities, says speculative buyers are no longer buying property in the commercial property sector. “The bigger players are still there,” he says.

Brian Azizollahoff, CEO of Redefine Income Fund, the fifth-largest listed property company on the JSE, says there “are some changes that have taken place in the market in the past six months or so where to some degree some smaller players have left the arena because of higher interest rates”.

However, Azizollahoff says he does not think that a significant number of investors have left the market just yet.

He says usually in a rising interest rate environment there is a lag between interest rates rising and private investors feeling the effect, to the extent that they are either forced to sell or decide not to purchase property.

Azizollahoff says that at auction sales there are still private investors purchasing property, albeit to a lesser degree.

“It is an overexaggeration to say that the private investor market for smaller properties has collapsed. There is no doubt though that competition among the institutions and the listed property firms for prime quality stock will remain fierce, which is keeping yields low,” he says.

“The kind of properties that fit Redefine’s profile are difficult to come by at yields which offer value to Redefine unit holders. It is predominantly this environment which has refocused Redefine on developing its own properties.”

Article by: Nick Wilson -