PROPERTY: Waiting For The Other Shoe
Recent Western Cape Business News
THE full impact of the global financial crisis is still to be felt by the commercial/industrial property market in Cape Town. The extent of the eventual impact remains undefined at this stage, but right now, owners of property are largely not yet forced to sell, and bargain hunting buyers (‘vultures’ in less charitable terms) are going to be disappointed.
There is still confidence in local property and capitalisation (cap) rates seem to be stuck in a range of between 8% and 11% depending on how prime the property is, and it’s unlikely that cap rates will be rising, says a De La Porte property report.
“The only time a seller is going to capitulate to an unreasonably low offer is under extreme financial duress, and we haven’t experienced much of that yet.”
The days of sitting on a property while waiting for capital appreciation to vindicate its purchase or to support the case for holding on, are over. Yes, properties will gain value, but at nothing like the rate experienced while South Africa played ‘catchup’ with world property markets. The best one can expect is about 6-7% annually for some time to come.
Dropping lending rates will make property more affordable to hold and hopefully banks will ease up on lending criteria but it is unlikely to have significant effect on building prices unless there is a major upswing in the economy.
For investors, it’s the yield that determines the attraction of the building – and then that’s got to be sustainable over the estimated period of ownership. Sellers must be realistic about this when they set an asking price, the report says.
That said, there is good stuff to be had for the wise buyer and there’s no doubt buying in a soft market is a lot better than buying in a boom. It stands to reason that the outer peripheries of the prime circle are going to be more attainable for buyers now, as stagnant or shrinking rentals make it easier for tenants to get better premises in better positions for less, and the out-lying areas lose tenancies to upgraders.
The bad times won’t last forever and those less attractive industrial precincts will have their day again as rents reinflate. On the other hand, softer rentals also mean that industrial land is a lot more negotiable right now for the intrepid who are prepared to wait for a better time – though this could be some time away for spec developments, and rentals will have to firm dramatically before it arrives.
Talking of good times, there’s definitely a mood of optimism among the community at large, and the property investment community is not immune – that’s why, while business has slowed (there’s no denying that) there’s a steadiness at the core, which is very satisfying. Don’t discount 2010 – who knows, it might just be the blockbuster that it’s being punted as. There’s going to be a lot of football fans here and the publicity effort is going to put SA back on the map as an attractive option. What remains to be seen is the performance of our new government.
There seems to be a trend for certain sellers to mandate agents at unrealistic prices and when agents either don’t show interest or try unsuccessfully to sell the property, the seller then resorts to an auction in an attempt to attain his price. This often results in an outcome in which the property still does not sell, or it does - at a lower price that an agent could have achieved in the first place. Remember, while you, the seller, don’t pay the auctioneer’s commission, the buyer factors his need to do so into his final bid. That’s not to say there isn’t a role both for brokers and auction houses.
There are recent reports that the City of Cape Town will increase property rates by 15.8% - this will have a very negative effect especially in light of increased vacancies and rental levels that are already under pressure, the report says.
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