Foreign Investors Eye South African Real Estate

I was recently invited by the Royal Institute of Chartered Surveyors to attend a commercial property conference held in central London. A strong focus was taken on distressed property markets, whereby it was confirmed that advanced countries would still see pain in their property markets for some time but developing economies would strongly outperform sluggish northern hemisphere nations.

Many of the speakers, economists and analysts felt that China, India, South America and Africa were the regions where property markets would recover quickest and provide the strongest returns as the global economy returns to health over the next five years.

South Africa was mentioned as one of the growth nodes where the country was not only accommodating an influx of foreign labour from other African countries but was rapidly becoming the gateway to the continent. Several delegates believed that when international behemoths such as Walmart, NTT and Zara invested in Africa, they would use South Africa as their regional head office for a pan African roll out strategy. This creates demand for local, commercial real estate.

I followed the conference with a four day tour of the UK’s largest auction houses, including Allsop, Cushman and Wakefield, Barnard Marcus and others. This is an annual trip I take to see whether our auction business is lined up with the world’s most established and reputable auction companies.

This was the first time that I felt that South African property was way ahead of European markets, which are in great distress at the moment. They see South Africa as an exciting emerging economy and, despite the global downturn, a strong investment destination, which would still grow sharply. A strong Rand, first world infrastructure and renewed foreign investment will make South Africa a popular choice for global property investors.

One must remember that on the commercial property side, besides the investment in Cape Town’s V&A Waterfront, there hasn’t been enormous foreign investment in local real estate. With the strength of our emerging economy, now palatable to offshore investors, we may finally see foreign investors chasing South African industrial, office and retail property.

Unlike the UK and the USA, credit growth in South Africa was pushed up mainly by demand from the household sector, and this sector is likely to remain the main driver of credit growth during the second half of the year, following the interest rate cuts, income growth and some improvement in employment prospects. Although many analysts believe that interest rates are likely to remain unchanged at the next meeting of the Reserve Bank’s Monetary Policy Committee, given the uncertain nature of the recovery, a favourable inflation outlook and a strong rand, a further rate cut remains a possibility.

We have already found that the last rate cut gave impetus to the market and increased buyer demand. Another rate cut will lower yields and boost the market. This is a positive for foreign investment and we see interest growing in both the physical and listed real estate sectors.

Unlike many banks globally, the five major South African banks are extending credit, albeit cautiously. Growth in mortgages was firm in August, rising by 1.1% m-o-m and 4.8% y-o-y. Despite the fact that the overall trend remains weak, consumer confidence is likely to remain firm during the remainder of the year as worries about job losses abate with better general economic conditions compared to last year. Foreign investors take comfort in the strength of South African banks and, despite HSBC not pursuing the acquisition of Nedbank, South African banks are held in high regard for the way they are weathering the global downturn.

Another positive factor for foreign investors is the fact that household balance sheets should improve following high wage settlements reached during the negotiation season. This, together with lower interest rates and inflation, should keep household spending positive and stimulate demand for credit. However, part of the benefit could be offset by tight credit standards and high debt levels, which will prompt some consumers to use the favourable interest rate environment to settle their debt rather than applying for more credit.

Whilst corporate demand for credit is likely to remain weak as the private sector remains wary of accelerating capital expenditure in the face of ample spare capacity and the fragile economic recovery, foreign investment in retail, services and mining may boost business confidence in the medium term. These are all optimistic signs for the commercial property market and the reasons why South Africa is being viewed as an attractive investment destination.

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