In 2011 the greatest challenge for the auction industry will be to refocus on a buyer’s market still constrained with a shortage of demand and an over supply of non-income producing properties.
As the country gets used to a long, hard and bumpy recovery, the economic headwinds will still be strong and unemployment rates alarmingly high. While the lowest interest rates in 30 years will boost sentiment and cause a bounce in properties with reliable cash flow, the favourable interest rate environment won’t be a magic pill which quickly relieves the downturn. Finding the right buyers at auctions and getting funding will remain challenging. Business confidence will be dependent on a host of local and international issues; including fears of a potential sovereign debt crisis in Europe.
While distress at retail level may slow with lower interest rates, and banks now well geared up to assist defaulting clients, corporate distress will grow with larger liquidations bringing higher value assets to the auction floor.
High value bankruptcies will increase throughout the year, presenting opportunistic purchasing like never before seen in South Africa. As liquidators and banks get more desperate to offload bad debts and an oversupply of development land, a sweet spot will emerge for investors with access to financing as they pick up these assets at bargain prices.
The residential property market will remain flat for most of the year with a stronger recovery at entry level. Investors will snap up properties below R1 million, which for the first time in many years will provide stronger returns than cash in the bank. The middle market will remain flat for some time as it deals with oversupply in newer residential areas. The luxury residential market across the country will remain weak all year, with little help from interest rates, and a strong Rand constraining international demand.
Leisure residential properties at the coast, on golf courses and in other non-urban areas will also remain flat with many properties being sold at auction below replacement value.
Next year two pieces of legislation may have a major impact on the auction sector. The Consumer Protection Act will change a wide range of issues regarding the auction process, mandates and sales processes; these are all designed to look after the consumer’s interests. The new Companies Act will also have a material effect with the introduction of Business Recovery. This may cause an initial slowdown in liquidations as companies go through the business recovery process. It is possible that liquidations may increase later in the year as banks rush to secure their positions on property exposures. Either way, it will have a material impact on the auction sector.
The commercial property market will become two-tiered; good properties with strong covenants and reliable cash flow will experience a surge in demand as investors look to place their cash in areas that achieve greater returns than bank deposits. Blocks of flats, retail property and key industrial sites will form the strongest part of the market. The office market will remain mild but A-Grade properties in prime locations will attract strong demand on the auction floor. An area of concern will be hotels, guest houses and leisure resorts which will battle in 2011 and may hit the auction floor with little demand.