Commercial rentals not way down

Trading continues and investors who were active during the period from 2006 to 2008 are still evident, albeit much more prudent and "yield-conscious" than before. So says Geoff Stroebel, GM of Pam Golding Commercial in the Western Cape, who adds that "against the backdrop of South Africa's resilient economy – despite the downturn, and with its varied areas of speciality ie industrial, retail and offices, the commercial property sector continues to experience movement".

"Perhaps the hype of next year's FIFA World Cup is carrying the momentum forward, but the fact is investors are still buying properties and premises and we have not seen the market become a noticeable 'buyers market' at all," says Stroebel.

He says it is true, however, that the crunch in the retail sector, which has seen many retail shops closing down and leaving gaping spaces in shopping centres, has had the knock-on effect of negatively affecting the supply-chain business and of course the manufacturing sector. Similarly, it's a fact that businesses – ie commercial tenants, have also tightened their belts and have held back either on their expansion plans or plans to relocate to perhaps upgraded premises. All this has seen vacancy factors rise, and somewhat dramatically in CBD's where figures have risen from 2% in the heady, boom times to sobering 12-15% levels.

"Yet commercial property rental rates certainly have not dropped significantly despite the state of the economy, and we are still seeing favourable rates in the Cape Town CBD and peripheries running at around R95-R140 per square metre for A-grade space. Having said that a number of office developments have recently been completed, and as a result of the tighter market conditions we are seeing quite substantial areas of vacant space which could or would have been taken up by large corporate tenants.

"As a result many landlords have been willing to enter into negotiations with distressed tenants rather than take more drastic action, realising that a paying tenant is a favourable asset."

Stroebel says in the current market the old adage "if the price is right" seems applicable – as then a deal can be reached. "Unfortunately many sellers are still under the misconception that unrealistic asking prices will be considered, and need to understand that investors will not just purchase bricks and mortar in the hope of capital growth down the line. While two years ago we were able to talk 8% or 9% yields, today shrewd investors will only start taking a serious interest in discussions at the 11% mark.

"With cash investors being those most active in the current market, the recent interest rate reductions have seemingly had little impact on the commercial property market. As is the case with the residential market, until the financial institutions relax their lending criteria we will not see a flurry of borrowing activity, which would lead to more sales taking place. The general outlook for the industry seems to be a six- to eight-month period of tighter trading conditions, but there are definitely some signs that the residential market is awakening and so I predict that commercial property will ride out on the back of a recovering residential market – and by the middle of next year (2009) we should see some recovery.

"As stated, this is not a commercial property buyers' market, so those looking to invest will not pick up bargains per se, but should be willing to make reasonable offers and thereafter be prepared to negotiate on a seller's counter-offer. We have seen quite a few deals being struck whereby buyers have indeed put in sometimes low offers, where the seller has countered with a more realistic price than their original asking price and after due negotiation, a deal has been concluded which satisfies both parties. This is the benefit of using a professional property broker with a good understanding of the market – to handle the sometimes intricate process of price-counselling both seller and buyer to realistic levels," says Stroebel.

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