Expectations build for more capital in 2015
Last year saw the listed property sector raise more than R40-billion in capital, compared to R18-billion in 2013, and 2015 seems to have got off to an active start, indicating another strong year for capital raising in the sector.
So says Craig McMurray, managing director of Bridgehead, a capital management company. “The listed property market out-performed all other asset classes in 2014, delivering a total return of 26.6%, but 2015 could be more subdued considering the local economic and political headwinds involved.”
He adds that 2015 is expected to produce similar trends to those experienced in 2014, while the increasing interest from institutional investors in the residential sector should continue to gain momentum, with new traction from specialist funds aiming to provide investors with focused offerings.
“This could prove appealing in a market that has undergone substantial consolidation over the last few years, leaving fund managers with a limited availability of quality stock and increasing concerns over portfolio compositions that have sacrificed quality in the interest of scale,” he says. “Redefine’s recent entry into student accommodation through its investment in specialist student accommodation developer and manager Respublica is an indication that the sector is coming of age, as it is in the United States and Europe, and is now seriously regarded as an institutional asset class with a favourable return profile.”
Estienne de Klerk, executive director for Growthpoint Properties, adds that although 2014 wasn’t the easiest year for the fundamentals in the real estate sector, the difficulties didn’t impact on the share market, a factor that can be attributed to flat interest rates during the year.
“Going forward into 2015, I don’t expect the market to be too bearish, but it will remain competitive, with certain nodes being winners,” he says. “Sandton and Rosebank are attracting new developments being built for specific users, but you will find in two to three years’ time, when the big tenants take occupation of their new sites, that the availability of older, less upmarket buildings (the ‘backfill’ space) will have a depressing impact on the market.”
Fran Teagle, divisional director at Broll Commercial Broking concurs: “There is currently 500 000m2 of land zoned for high rise office development in Sandton for specific tenants (such as Webber Wentzel, Sasol, Discovery, Bowman Gilfillan, Werksmans and others), which is going to mean that older buildings will become vacant within the next two to three years, and will need to be upgraded or redeveloped for future users. With many of these new buildings working towards four Green Star ratings, older buildings will lose favour with tenants because of high electricity costs and other inefficiencies.
“Despite the success of the Gautrain, developers are still having to provide five parking bays per 100m2 of office space, as more people are being accommodated in open plan spaces,” she says.
De Klerk adds that new developments are incorporating common areas that provide occupants with a far better experience of their office environment, with many including services such as restaurants and franchise coffee shops.
“The new Discovery campus, for example, will include gyms, swimming pools, a running track on the roof and rooftop organic vegetable gardens for use in the building’s canteens,” says Teagle. “The focus is on providing happy, friendly and usable spaces to attract and retain good staff — and keep them healthy and strong!”
McMurray says that operationally, landlords will be forced to engage more actively in property and asset management activities to sweat the most out of their existing portfolios where tenant retention, lease rates on renewals and operating costs will be under the spotlight.
“In particular the vacancy rates in the office sector will be under increasing pressure considering the overhang of stock in the market, the benign economic outlook and substantial new development activity, especially in prime, decentralised nodes like Sandton,” he says. “The rental margin for the best of landlords will be challenged by lower escalations expectations hinted at by dropping inflation forecasts, together with high municipal rates and tax inputs.”
Moving out of Johannesburg to identify other winning commercial property nodes, De Klerk points out that eastern Pretoria around Menlyn and Umhlanga just outside Durban show great promise, with the CBD, Century City and Claremont in Cape Town remaining very popular.
The V&A Waterfront is seeing aggressive development of commercial space too. De Klerk points out that of every dollar spent by tourists in Cape Town, 60 cents is spent at the V&A Waterfront.
When it comes to secondary cities, De Klerk says that Nelspruit is a winner, reaping the rewards of its location on the corridor to Mozambique. However Rustenberg, which used to be a star performer, has been impacted badly by the recent strikes, unrest and slow planning consents.
Pressure on infrastructure
“Regardless of location, there is tremendous pressure on infrastructure, and landlords will increasingly have to invest in infrastructure themselves, or they will have to work together to lobby municipalities to up the pace of service delivery and infrastructure development,” he says. “The South African Property Owners’ Association is doing a lot of good work in this regard at the moment, working hard to build relationships with mayors and city managing committees.”
In the retail sector, De Klerk says that there is no doubt that spend has slowed down, with results from retailers showing that growth has dropped between 5% and 7% on a same-store basis.
“While retailers are still looking to grow, they are hesitant to commit to new sites,” he says. “My view is that new retail developments are much higher risk than they were a few years ago, as it is going to be increasingly difficult to get commitment from retailers.”
When it comes to growth in rental rates, De Klerk points out that retail rental rates are a function of the trading densities of each centre, and that the larger retail centres have performed well, in spite of adverse economic conditions since the global financial crisis.
“This is why landlords of retail centres are enjoying an average 7% to 8% escalation in rental income,” he says. “This is in contrast to the commercial office sector, where landlords are more negotiable on rental terms, or will accept lower- than-inflationary initial rental increases, in order to keep their tenants at a time when vacancies are higher than is desirable.”
He adds that the falling petrol price has been a tailwind for the retail sector, with more money in the system giving centres a boost in the last couple of months. “However, the pressures seen late last year affect the neighbourhood centres the most, and I expect that it’s these locations that are still going to struggle in the coming year.”
Landlords remain skittish after the Ellerines collapse, he adds, because business rescue plans are often more punitive than liquidations in the retail sector from the landlord’s point of view.
“Landlords are acutely aware that another large retail group has a huge offshore debt burden, and they are watching to see how this group manages its debt in the coming year, in the hope that it is transparent about its plans to resolve its capital issue in such a way as to keep clear of disaster,” he says.
In the industrial sector, vacancies are at around 5%, with several new high tech industrial developments coming into the market.
“Development costs have not increased materially — but this has meant that there hasn’t been much growth in rentals in this sector,” De Klerk says. “The sector continues to benefit from growth in retail further afield in Africa, and the growth in online shopping in South Africa is stimulating occupation in the industrial sector too.”
De Klerk says that the market generally was running in a more conservative fashion in late 2014, in anticipation of increased interest rates.
However, the recent reducing interest rate environment in the bond market is likely to see growth in real estate values, as the sector is not as much at risk of interest rate hikes as was previously expected.
Disclosure: The Mail & Guardian’s Johannesburg offices are in a building that is managed by Growthpoint