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South Africa’s Commercial Property Finance and Market Outlook

Despite the commercial property finance market bulking under the strain of poor GDP growth and rising operational costs, compounded by low business confidence in 2015’s first quarter, the market remains remarkably buoyant. It continues the strong trend witnessed over the past few years, and remains defiantly resilient. There is a notable trend in the property finance sector since the Global Finance Crisis of 2008, namely the improvement in the quality of its book.

A mere five years ago, up to 3.5% of South Africa’s total commercial property finance book was problematic. Today, that number has dwindled to less than 1.25%. By banking standards, that is a low ratio. In fact, the bank sector finds anything below 2.5% to be acceptable. The credit loss ratio, usually ranging between 0.2% to 0.4%, is presently less than 0.2%.

One of South Africa’s largest banks, Nedbank, states that their property finance division has performed consistently in recent years. It still manages to attract large market share in the South African commercial property finance market, at approximately 34%. There are, however, some headwinds facing the market. One is the impending implementation of Basel III capital and liquidity requirements. This will present some challenges making it more difficult and costlier for banks to lend capital on a long term basis.

South Africa’s Property Market Remains Resilient

Aside from the Basel III capital and liquidity requirements, there are also new liquidity ratios to be applied in 2018, requiring banks to source funding for its loan book of duration matching the duration of the loan. This could prove difficult in the South African market. It is likely that banks will be forced to shorten the period of their loans to property investors.

This, in turn, may also result in non-bank lenders making their presence more known in the property finance market. The reason for this is because these lenders aren’t subjected to the same strict regulations that Basel III imposes on banking institutions in South Africa.

Listed Property in South Africa

The listed property sector in South Africa continues to see high levels of activity. Most of the big players are looking to increase the size of their portfolios. However, as listed property funds in South Africa has a great reputation for being well managed and diversified, they do continue to represent the safest prospect from both a lender’s and investor’s perspective.

The Office Market in South Africa

South Africa’s office property market remains a concern for bankers, specifically in locations where there is an existing oversupply of stock. A Grade office space in Sandton currently faces vacancy levels of over 11%. Most projects remain tenant driven in this sector.

Industrial Property Market in South Africa

The South African industrial property market has enjoyed positive growth over the past few years. One reason for this is because it drives efficiency and scale in distribution and logistics amongst retailers. The market also continues to be fuelled by other balance sheet transactions.

This outlook, although in part challenging, continues to drive a positive view of South Africa’s commercial property outlook. It remains one of the best investments for property investors to make, and the outlook isn’t bleak at all.

Contact us to find out more or discuss your own plans for commercial rental properties in 2016.

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