2012 will be a crunch year

As buyer-demand cooled, concerns about global sovereign debt heightened and weak prospects for the local economy worried investors. “From an auction perspective, we saw a distinct cool off in demand from the third quarter. In an industry, well versed in cheery talk about prospects, no-one can claim that the property market has endured anything other than a bruising 2011,” says Auction Alliance CEO, Rael Levitt. Despite this, Auction Alliance concluded the year with an excess of R6 billion worth of sales.

“Early in the year we said that the outlook for the residential market would be perturbing with a predicted "double dip" in house prices after 2010’s short-lived uptick,” explained Levitt. During December last year, Auction Alliance stated that: for the next 18 months, improvement in house prices seemed unlikely, given huge uncertainties over the strength of the economic recovery. “In fact, there has been neither an economic nor a property recovery.”

“It is most likely that, during 2012, we will see further house price lethargy and contraction. The luxury and leisure residential markets remain the most beleaguered, with entry-level housing being the bright spot on a murky horizon.” says Levitt.

In 2011, the greatest challenge for the auction industry was attracting buyers who have been over supplied with non-income producing and distressed properties. “Throughout the year, economic headwinds were strong and low interest rates did little to boost sentiment after a five year debt binge.” Levitt says that 2011 was also a “game changer” for the auction sector with the implementation of the Consumer Protection Act, however, the full effect of these regulations is still to be implemented.

Levitt reflects that he was correct when he said, in January, that the commercial property market would become two-tiered: prized properties would experience a surge in demand whilst lower-end properties would have less appeal.

The volume of vacant office stock continued to rise during 2011, but began to tail off as few new developments commenced. Office block sales were strong in the first two quarters, compared to 2010, but there was a stabilisation in enquiries by the end of the year. Retail property transactions remained robust throughout the year and yields for prime properties reached 8%; although there was a decrease in demand for smaller retail units and strip malls as more vacant stock coming onto the auction block - this was prominent outside Gauteng.

While there was a small increase in the number of enquiries for industrial property, occupier and investor sentiment now seems to have steadied. Development land continues to be the weakest performing part of the market, and the downward trend, seen since 2010, will continue. Auction Alliance sold over R350 million worth of failed developments in 2011 despite feeble demand. “With deep discounts now being offered for land, we may see land banking grow in the New Year.” We expected far greater numbers of hotels and guest houses hitting auction floors, but our outlook for this market remains precarious.

The new Companies Act, which came into effect in May, had a material effect on auctions with the introduction of Business Rescue. In the last quarter the new statute caused a slowing in liquidations as higher-value distressed companies opted for business rescue. In many instances, this has caused a bottleneck of insolvent companies that have no chance of recovery. “We will see a spate of higher-value liquidations and auctions in 2012 when the logjam clears,” predicts Levitt.

The market saw a spate of distressed houses hitting the market but banks are methodically clearing out their inventory whilst the real trouble now seems to be with larger banking exposures in areas other than home loans. “In June, we acquired the online motor auction platform, DealersOnline and despite selling 1550 vehicles, with a turnover of R180 million in the last two quarters, we have seen a decrease in motor vehicle repossessions and this, at a retail level, is a positive trend.”

The country’s largest liquidation sales were held in 2011. This includes the R720 million sale of the failed Bel Air and Lone Hill shopping malls in Gauteng. “In every single sector from farms to apartments, luxury homes to aircraft, office blocks to shopping centres we saw record breaking value transactions hitting the auction floor this year. Auctions have shown that there are no price barriers and that they are an asset disposal vehicle that cuts across all price classes and asset categories,” explains Levitt.

According to Auction Alliance, distressed sales accounted for 47% of the company’s auction revenues: “this is a concerning trend for us, but more so for the property market.” Despite the decrease in demand which affected all sectors, Auction Alliance, which is now heading into its 20th year as the country’s largest auction house had a record breaking year.

“My outlook for 2012 is disquieting. Quite how bad will depend on a myriad of global and local issues, but there is no doubt that 2012 will be filled with challenges and tribulation,” concludes Levitt.

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