Although the South African residential property market growth will be flat for the next two years, the commercial sector’s recovery is underway.
For many investors, commercial property was always a first choice because, whereas residential property can almost never give yields above single digit levels, double digit returns have been the norm in the commercial sector, he says.
According to Jason Lee, head of Rawson Properties commercial franchise division, this will be a change from the traditional pattern that follows downturns, which is for the residential sector to lead the recovery.
“I think the residential sector is likely to take longer to emerge from the present stable, no-growth situation but the prospects for commercial property are now looking good,” he says.
He explains that the commercial sector has shown a greater degree of resilience in the downturn than residential property.
This is due to the low current interest rates which have made bonds more attractive and encouraged cash-strong investors to look elsewhere for yields greater than those available from the financial institutions.
For many investors, commercial property was always a first choice because, whereas residential property can almost never give yields above single digit levels, double digit returns have been the norm in the commercial sector, he says.
He says over the last two years, the Johannesburg Stock Exchange listed property companies that are heavily committed to commercial portfolios have outperformed almost every other class other than precious metals and raw materials such as iron ore.
Asked if, in the current near recessionary conditions commercial property is not likely to see more defaulting tenants than other sectors, Lee says if one examines the Sheriff Auctions lists, it is clear that commercial properties do not feature greatly in them.
“The number of commercial properties repossessed in the last year has been almost insignificant in relation to the massive inflow of this type of property on the residential side.”
He believes this is partly due to landlords in today’s markets learning to be far more sympathetic and understanding about tenant problems and rent increases.
South African landlords have been able to assist and help their tenants through the last difficult year and will continue to do so in future, he says.
Banks have traditionally been keen to partner commercial landlords because they can very often manage a 20 percent to 30 percent deposit and because banks can deal directly with them not through bond originators.
He says bonds are usually spread over relatively short periods. Banks usually stand to lose large sums if commercial property is sold as distressed stock on auction.
They prefer to look at interest only facilities and even repayment holiday periods to assist the landlord rather than pull the plug.
Lee adds that the comparisons that he has drawn between commercial and residential property should not be taken to mean that he disparages residential property investment.
“Now is a very good time to build up residential property portfolios.” – Denise Mhlanga
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