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Gradual recovery for commercial property

Mike Mortimer, head of commercial property, said: "I think we have turned the corner. We're not going to see 2005-2007's exponential growth, quite frankly it's not sustainable, but things are getting better slowly."

Bobby Malabie, Chief Executive of Absa Retail and Business Bank, said that although market conditions were difficult to read, there were tentative signs of recovery in selected sectors of the South African commercial property industry.

He added that the industry, which encompassed retail, office and industrial property, should benefit from a delayed and more gradual move to higher interest rates than was previously envisaged. However, the property market was still faced with a number of contradictory indicators.

"We have seen a stabilisation and gradual reduction in our underperforming book, indicating that the distress in the market is contained, and is not as severe as we experienced a year ago," according to Malabie. "This is symptomatic of an industry on the turn."

Malabie argued that the Eskom crisis, which came to a head in early 2008, had turned out to be a blessing for the South African commercial property sector.

"A large number of developments were put on hold as a result of uncertainty over the supply of electricity. Viewed in hindsight, those decisions have potentially saved us a great deal of pain due to an oversupply that could have occurred as a result of these developments proceeding."
Absa said, nevertheless, that there were a number of thorny issues still facing investors and financiers in the commercial property sector. A particular challenge was that rental escalations were not keeping track with rising operational costs. Utility charges were increasing at a pace well in excess of inflation, which made it difficult to forecast net income with any degree of accuracy. This added to prevailing uncertainty and weighed heavily on investment and development decisions.

Mortimer stressed that South African corporates had the highest savings rates recorded since 2000, but net investment activity had been easing since 2009.

Malabie added: "Businesses are shoring up cash reserves because of a lack of confidence. For now, there is no catalyst for significant development and fixed investment."
These concerns are reflected in the SACCI Business Confidence Index, which has continued to decline steadily from March to August.

Malabie said: "Almost half of our distressed loan book comprises of residential development, vacant land and hotels. These sectors make up a very small percentage of our overall loan book and we will not be lending aggressively into them in the short to medium term.

"Outside of these areas, there remains reasonable scope for suitable investment returns, given that we see the commercial property industry as being on a gradual upward trajectory. However, circumspection is key and sustainability of property assets and related cash flows should be aggressively interrogated before any development or investment decisions are taken."


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