Rise in auctions of commercial properties bad news for building industry

Finance week reported this week that the number of commercial properties on auction have increased  from 60 (March 2008) to 110 in March this year. Following a wave of speculative investments over the last few years, despite weaker economic conditions, poor consumer spending and rising vacancies, smaller investors are now cash strapped.  Banks, are off loading defaulting properties at discounted rates. This means significant buying opportunities for commercial investors. Ideally investments should yield between 12% and 14% (annual gross rental income as a percentage of market value), but over the past few years investors were typically buying properties in the range of 8,5%, now trading at 10% to 10,5%, according to  Winterstein, property sales director at Aucor auctioneers.  Prices are expected to soften further this year, pushing up average yields to close to 14%. So while this is a great time to start investing in commercial property, buyers struggle to access finance. Hardest hit are properties in the R20m to R50m price range, including small shopping centres (between 5000sq m and 10 000sq m), office blocks, warehouses and factories.  These properties are now offered at 20% to 25% less than two to three years ago.  Attractive yields are presented in the hotel and hospitality sector due to lower occupancies and an oversupply of rooms in many areas.  Potential buyers must be aware that the fundamentals of the property market could continue to show signs of weakness over the next 12 months. These include vacancy rates to rise further, falling rentals, and the growing supply of incomplete and over-funded property developments that lie dormant. Some of these larger scale properties could take years before being liquidated, seriously affecting new commercial developments.

The commercial sector follows hot on the heels of the residential market, that dominated the auctioneering market in 2009. The outlook for new commercial developments weakened during the last six months, but we have warned that even though some indicators, such as the plans approved, continued to improve during 2009, that an increase in project postponements, will severely dampen construction growth prospects.  This coupled with warnings of further electricity outages in 2011, means fewer developments will be approved for construction due to electricity constraints, and will be subject to stringent energy efficiency requirements. There are good opportunities for retro-fitting existing buildings, as is the case with the Department of Public Works that plan to retro-fit 12% of government buildings to be more energy efficient.