According to Auction Alliance, the values of both residential and commercial real estate assets in South Africa are expected to fall by a further 10% over the next 12 months. The auctioneer warned investors considering ploughing their money into property to be thorough when carrying out due diligence.
“Three years into the recession, the question on the status of the commercial property sector’s recovery is difficult to answer, with recovery appearing to have stalled significantly in recent months in the face of renewed economic fears”, says Rael Levitt, CEO of Auction Alliance.
With investor demand being hampered by enduring economic challenges and stalled global growth, Auction Alliance is predicting a gradual and patchy recovery for the local commercial property sector over coming months, with certain segments expected to perform better than others.
Levitt anticipates that the bifurcation which has been characterising the market will widen further within coming months, with investor demand for securely leased core assets expected to persist, whilst conversely, demand for secondary assets in ancillary locations is anticipated to continue subsiding. “Whilst investor focus is expected to remain firmly on prime assets, they should not overlook secondary assets in good locations, particularly due to the limited supply of core assets”.
According to a recently released report by Price Water House Cooper in the US and the Urban Land Institute, entitled Emerging Trends in Real Estate 2012, “The return landscape for 2012 presents a mixed bag, and all depends on where and when investors bought, the amount of property leverage employed, and asset quality”.
The report warns that, “As markets creep back in 2012, investors can no longer just ride the capital tide of rate compression, but instead must pick projects well and execute on management”.
This week’s warning by South Africa’s major banks that a "disorderly" resolution of Europe’s debt crisis could plunge the global economy into a recession similar to the one that followed the collapse of investment bank Lehman Brothers three years ago raised concerns for the local economy. Standard Bank South Africa’s head, Sim Tshabalala, described the current global economic climate as “toxic”, and said the potential for a recession in the US and Europe threatened emerging markets such as South Africa.
Another important factor is the performance of local municipalities when considering commercial property investment. Redefine one of South Africa’s largest listed property groups, has already decided to stop investing in poorly run municipalities and halted further improvements on their existing properties in such areas.
“South Africa poses its own challenges to the property investor with rising costs and an increased risk of stagflation in the economy, as price pressures rise and economic recovery remains sluggish. Both buyers and sellers need to realign their expectations of the property sector, and face up to the tough reality of today’s market”, says Levitt.
Despite the increasing caution characterising investor sentiment, and concerns whether supply, which is expected to increase further, will match demand as banks and businesses release stock within coming months; Levitt asserts that even in a flat market there is opportunity within the real estate sector.