Commercial property yields on the rise
The slowdown of the commercial property market has started to take effect and yields on commercial property investments have started to rise.

This is according to Tony Bales of Bales Delaporte Dealmakers who says that it was less than 18 months ago that a fixed property could not be found to invest in, yields on commercial property were around 8% and the listed property sector was at an all-time high offering forward yields of around 7%.

“Enter the global financial crisis and the resultant negative sentiment, higher local interest rates and reduced demand for property investments and we are seeing a very different picture.”

“The listed property sector on the JSE is now offering yields as high as 14% on certain shares. Yields on fixed property have risen into double-digit territory in Cape Town, which has traditionally had the lowest yields in SA. Yields in Gauteng and other areas are generally about 1 – 1.5% higher than Cape Town, thus ensuring investors in fixed property being able to find investments offering returns of 11%+ in Gauteng.”

“Another contributing factor,” says Bales, “is that banks have become risk averse and are not prepared to give investors the level of finance they used to get. There is often the case that there is a willing seller, willing buyer, but an unwilling financier!”

“Property owners are finding it difficult to get used to the idea that their property values have in fact dropped during the last 12 months, but their income has gone up. Many investors are choosing to just hold onto their properties, but those wishing to sell are coming under a lot of pressure to be realistic with their selling prices.”

“Thankfully, commercial property is underpinned by longer leases, but in many cases tenants are also taking strain and the underlying cash flows are not as solid as investors would have wished for. This further exacerbates investor negativity.”

Bales advises that at the moment, the local commercial (direct and listed) property market’s fundamental driver appears to be interest rates.

“The current outlook forecasts a period of higher interest rates for a few years ahead before inflation pressures and ultimately interest rates soften. In the short term, property investors should get used to this changed environment and adjust their portfolios accordingly. For those able to remain committed, the longer term should continue to show good returns on commercial property,” concludes Bales.

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