Current market conditions provide property investors with good value
Despite difficult times in the property market in South Africa, fundamentals of commercial and industrial property remain strong, says Rob Wesselo, head of equity investments at Absa Commercial Property Finance.
“From an equity point of view, we are currently in an exciting space in the property market,” says Wesselo. “Current market conditions provide property investors with good value for quality properties and auspicious investment opportunities in this sector.”
He says the rental market is particularly buoyant in industrial and commercial markets, showing strong rental growth and high tenant demand. According to Wesselo there are a number of reasons for the rental growth market. Rising development costs and a shortage of serviced land due to power supply shortages have slowed supply of new developments in the commercial property sector. In addition, increased costs have also hindered growth. In the last 12 months construction costs of building office blocks have increased by approximately 30% and developers are also faced with increased financing costs due to sustained interest rate rises.
Ten consecutive interest rate increases since June 2006, have caused commercial property prices to soften, resulting in repricing of assets. High interest rates and low property yields have forced many buyers out of the market in recent months resulting in a shortage of property investors. These factors, in turn, have provided equity opportunities for equity investors such as Absa CPF, says Wesselo.
In today’s difficult residential market, Absa CPF is taking a venture capital approach to targeting commercial and industrial property through: (i) investments in strategic holdings, (ii) investments in companies in which Absa has strategic holdings and (ii) investing in non-strategic quality opportunities. Absa CPF’s strategy in the medium-term is to take advantage of pricing arbitrage and the listed and unlisted property market, by partnering with quality partners.
By investing in strategic holdings, through partnership arrangements with developers who require equity for development, Absa acquires an equity stake in listed or unlisted property companies. For example, Absa CPF holds a 32% investment in Ambit, a property loan stock company. Another growth opportunity is investment in companies in which Absa CPF has strategic holdings.
“A strategic intent of Absa CPF’s is to be more active in managing property investment portfolios,” says Wesselo. “By partnering with a developer, Absa will bring the property transaction to the market with the intention of trading with the property rather than holding it as a long-term strategic investment, that is using a buy and sell approach rather than buy and hold.”
Other opportunities in the property market include continued growth from Diluculo Investments, a wholly-owned subsidiary of Absa. Through Diluculo Investments, Absa invests in the affordable housing market through the purchasing of apartment blocks for rental in the lower income price market. Although this growth strategy is still in an embryonic stage, Absa has already taken transfer of between 700 and 800 former office units and purchased an excess of 1 500 units. Absa intends increasing this portfolio to 10 000 rental units by 2011.
Another growth area for Absa CPF is investing in commercial and industrial property in the rest of Africa. “Absa will cautiously consider commercial and industrial property investment opportunities in Africa on a very targeted, measured and focused basis. We will focus on specific countries rather than trying to cover the continent at large,” says Wesselo.
“The commercial property market is not for everyone at the moment. But there are opportunities for strategic and focused equity investments, and these conditions are likely to last for some time,” says Wesselo.
