Retail Property leads the market to Recovery

Two tier commercial property market
Retail Property leads the market to Recovery

Recent sales are showing that well let and well positioned commercial property is attracting a surge in buyer demand while vacant property in marginal areas is attracting no demand at all. At one stage when the property market was growing aggressively, any property was considered good, but now we are now back to the 1990’s mind-set where a two-tier property market is forming.

As an example we can look at recent sales concluded by Alliance, where well tenanted neighbourhood shopping centres have been selling at single digit yields, sometimes below 8%. Recently in Durbanville, Pretoria and Johannesburg we have been shooting the lights out with well let centres or commercial properties situated in high demand areas. It is quite strange that in the midst of a slow economic recovery that buyers are so aggressive on pricing, but many investors are now chasing yields with appreciating annual rentals.

There seems to be a view that the retail sector will lead the commercial property market into a recovery and our sales around the country reveal that it is indeed retail properties showing the greatest demand and achieving the highest prices. After that it is industrial property, which in South Africa tends to follow the retail sector. The office market definitely seems a little weaker and is lagging both retail and industrial. We are finding it difficult to move b and C Grade offices, particularly those situated in older areas no longer deemed popular. There is still strong demand for office conversions in the inner cities of Pretoria, Cape Town and Johannesburg and these specific properties have been attracting high market demand.

Certain nodes, situated close to airports, stadiums, transportation hubs and other state capital investments are also attracting strong demand. Phenomenal prices are being reached in Rosebank, which is booming due to the Gautrain launch and a massive capital injection into the area.

Rising vacancies don’t necessarily mean declining prices as long as properties are well positioned. We have found that retail properties with blue chip tenants are attracting extremely high prices and even if some line shops are vacant, investors tend to focus on the strength of the anchor tenants.

What we have not seen at all in South Africa is distressed portfolios of shopping centres hitting the market. There have been a couple of well let shopping centres which have come under the auctioneer’s gavel, but these are because of collapsing holding companies, not because the underlying property investment is bad. While trading conditions are tough, portfolios with bad covenants are going to be weak for a long time, but for those with good property fundamentals, we are seeing the highest prices being paid in years. The two tier property market is also back to an environment where experienced property investors and developers, who have access to funding, are snapping up prime commercial properties like never before. We are now seeing the old familiar faces on our auction floors and they are timing the market well by climbing in right now.

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