Capitalisation rates under pressure

22 Feb 2013

According to the 2013 commercial property prospects, landlords are going to have to accept minimal rental increases and in many cases, rentals will remain pegged at 2012 levels.

The office sector will remain flat with vacancies and retaining tenants proving to be a hurdle property owners need to overcome in 2013, so new developments in the sector would be a riskier move.

And if this is not enough, capitalisation rates will continue to move sideways based on the view that interest rates are not expected to increase during the year and the economic growth should be enough to see vacancy rates stabilising at the current levels.

Louise Lombard, spokesperson for FNB Commercial Property Finance, says the factors putting upward pressure on capitalisation rates are arrears and rising operating costs.

However, she says proper management can reduce the negative impact on cash flow caused by these factors. 

“Well managed retail centres with the correct tenant mix that is suitably designed for its function will continue to do well, whilst the biggest challenge facing retail centres would be to manage arrears, vacancies and operating costs.”

Lombard points out that pressure in the office market would be because of smaller business experiencing cash flow strain thus resulting in migration to lower grade office space.

“A sector approach as well as a region approach in the industrial market can deliver great returns.”

Gary Palmer, chief executive officer of Paragon Lending Solutions, notes in 2012, there was strong demand in the retail sector, which experienced low vacancies.

There was particular demand in this sector for regional shopping centres, petrol stations and food chains.

“Although largely dependent on consumer spending and the local economy, the retail property sector is expected to continue to grow with a number of retailers looking to increase their exposure,” he says.

He says the industrial sector had also performed well and is likely to remain stable, having enjoyed moderate rental growth in 2012.

“High operating costs and the lack of new major industrial developments are the biggest threats to growth in this sector.”

There is, however, demand for upgraded operational facilities and convenient access to key transport nodes to reduce fuel costs are factors driving growth in this sector.

If Eskom get its 16 percent electricity hike per year, over the next three years, we are going to see even more pressure being placed on the commercial property market.

On the office sector, he says this will remain flat with vacancies and retaining tenants proving to be a hurdle property owners need to overcome in 2013, so new developments in the sector would be a riskier move.

While there are some sectors likely to see growth this year, some property experts believe it is not yet time to celebrate and Johannesburg Stock Exchange listed property company, Growthpoint Properties Limited, introduced a commercial deposit-free lease.

Read the article here.

Org Geldenhuys, managing director of property development and marketing company, Abacus Divisions, says most commercial property landlords will be “lucky” if they see their rentals increase this year.

“The commercial property market is stagnant and when it comes to rentals, we are not going to see much change this year.”

He notes that they may be pockets of excellence at certain office parks, or within certain property portfolios, but otherwise landlords will be hard-pressed to see their rentals increase.

Geldenhuys points out that there would be continued weak demand in the office sector with rising municipal charges – including the high cost of electricity.

“If Eskom does get its 16 percent electricity hike, per year, over the next three years, then we are going to see even more pressure being placed on the commercial property market.

“Businesses will be put at risk and we may even see a rash of rental defaulters,” he says.

Property finance

On finance, Lombard explains that as a result of a large portion of the consumer market being highly geared on loan types other than housing finance, their debt service costs are extremely high, disqualifying them from obtaining home loan finance and forcing them to rent.

Loan approval rates in the owner service property transactions are high as the bank has a thorough understanding of its client base and their underlying cash flow.

The rental stock market is therefore seen as a growth area, she points out.

On the residential development market the warning signs are in the gap between the selling prices of new houses versus that of existing houses. 

As this gap increases consumers will start focusing on existing stock thus reducing demand on new developments.

Frank Berkeley, managing executive at Nedbank Corporate Property Finance, says we are not going to see any dramatic changes in the commercial property sector this year.

However, the bank is still open for business and lends money to commercial property investors and developers.

He notes that there is demand but not as high as it was during the boom times.

Lombard says the bank lends money to investors and they are classified into three segment types of lending which include, owner serviced lending, investment properties for smaller investors and investment properties for key market players who are not listed.

Loan approval rates in the owner service property transactions are high as the bank has a thorough understanding of its client base and their underlying cash flow.

She says the challenge facing banks in the smaller investment property segment is mostly because of high gearing, tenure mismatch, interest rate risks, vacancies and renewal risks.

“FNB has recently established a key account focus area to service the investment property market for non-listed industry leaders.” 

This area is resourced with market leading skills supported by appropriate processes and procedures to meet requirements with respect to customised deal structures and cutting edge service delivery, underpinned by close relationships.

Since establishment of this area, an increase in approvals has been noticed, she adds. – Denise Mhlanga  

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