We present our brief synopsis on the markets we are following. We trust you find it to be of value.
UNITED STATES
A reputable survey of Global Real Estate Investors finds that most such investors expect the highest capital growth to emanate from the US Market. Whilst there are positive signs of growth in the US economy, the way forward is represented by some conflicting views. Some analysts are expecting a double-dip recession; others believe a secondary recession will be averted.
Liquidity, or rather unwillingness to commit capital, remains a telling factor with the banks remaining under pressure and private money still on the side-line for the most part. Of the 7800 odd banks in the US, 829 remain on the FDIC’s “problem list”, yet industry profits rebounded to $21.6 billion. US private funds are sinking into UK, Europe, Asia and Emerging Markets while at home defaults continue to escalate, albeit at reduced severity levels.
Further government intervention in the market is unlikely, as such stimuli will lead to the ill-effects of an excessive deficit in the long term. Commercial Real Estate occupancy levels are steadily rising, leading to increasing revenue and consequently increased asset values, which holds the key to recovery in the sector. A number of private equity groups have seen these effects and are gradually injecting liquidity into top-end cash strapped real estate funds.
The US economy is on a knife’s edge…very much a sentiment driven market at present. Repeated slaps in the face eventually causes retreat at the first sign of conflict and the US market has had its fair share of face slapping of late. A slow arduous recovery is certain…a double dip recession? It depends on who you talk to…we believe this may be averted but one more slap in the face with a high profile failure may well break the spirit and send it cartwheeling into recession again. The wise investor, who is an experienced market cycle trader, will remain calm, slow down and seize opportunities in the quagmire.
UNITED KINGDOM AND EUROPE
UK CRE commenced recovery in Q4 2009 and all sectors have shown double digit capital growth over the past 12 months, retail leading the charge followed by the office market and industrial bringing up the rear. Q2 2010 was characterised by a phenomenal spurt as offshore and UK institutional investors gained confidence. However, there has been a significant slowdown in the last four months as concerns over the health of the economy bring a level of caution to the market. While momentum subsides, the office sector strides ahead bolstered by demand for offices in central London where the strong take up of space will enable landlords to dominate rental negotiations for the time being.
A number of European markets are experiencing downward pressure on yields and escalated rentals leading to increased asset values. In fact, a great degree of stability exists with the market waiting for key economic factors to slot in place and give impetus to tenant demand and consequently property investment. Focus is on core prime properties on long term leases with strong covenanted tenants in major centres like London and Paris office markets that have made a strong showing.
The shining light in Europe is Germany which has seen significant activity across all property sectors in the last six months and is anticipated to more than double last year’s property trades. Germany is seen as a safe secure haven for investors and the sheer volume of activity is testament to this. A number of SA funds found it prudent to enter this market recently and it is already paying significant dividends.
AUSTRALIA
It would appear that the forecast of most Australian CRE investors last year (Property Market Review 2009-08) was correct in that the economy is set for a strong recovery in 2010 as retail sales and exports boom. Foreign investors, including big name brand SA funds, have seized the moment. These new participants in conjunction with the re-entry of institutional investors bodes well for the Australian CRE market. Even foreign residential investment funds are entering the market with a view that the current sideways movement in the residential market is set to turn North over the ensuing 12 months.
Dominant regional and sub-regional retail centres are in good demand and sell readily at around 8% yields. Suburban centres are also weighted with investors, trading at around 9% yields.
For risk averse CRE investors, the Australian market poses an extremely credible option.
SOUTH AFRICA
Recent failures in the SA market initially created concern but closer inspection revealed that such failures resulted from management issues rather than the economic soundness of the industry.
CRE in South Africa has remained remarkably resilient throughout the global crises and has consistently outstripped returns of some of the most prominent global markets. Some argue that this is partly due to the market standard of set annual rental escalations ranging from around 8% p.a. to 12% p.a. as apposed to rental reviews every 3 or 5 years as is the case in many mature markets, however, lease terms are of shorter duration than these markets (predominantly 3 to 5 years) which allows for regular rental corrections to market levels. So the resilience has more to do with the reasonable economic stability, fundamental soundness of the property market and acumen in the SA property industry rather than the structure of lease agreements. SA does not need to be number one globally, but rather needs to remain stable and consistent to attract investors to its shores.
A significant factor that has contributed this year is the en-masse re-emergence of private investors, some with hordes of liquidity to take up property disposals from funds that are realigning portfolios to core dominant assets in major metropolises as well as a result of sector reshuffling. Suburban retail centres are in ready demand however the greatest challenge is achieving consensus ad idem regarding pricing. Smaller retail centres outside major metropolitan areas remain a challenge.
A trend boosting the industrial market is fund realignment to this sector and large industrial manufacturers seeking to procure their own premises, particularly in Gauteng. The office market is rather fickle due to the ease of occupiers to relocate, however tenancy demand is steady. Of concern is Government tenanted buildings where an ever increasing number of BEE investors are declining to pursue opportunities due to new unfavourable lease conditions contained in the Government’s standard lease document and some suspect “extra-ordinary costs” which are particularly prevalent in the FS.
Overall, the SA CRE property market is a sound investment choice across all sectors with a preference for well-established nodes of economic activity.
Comments and observations are welcome.
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