LAST year was a tough one for South African real estate and, after three years of trudging through a severe downturn, the year did not present a clear path to recovery. As demand cooled, concern about global sovereign debt rose and weak prospects for SA’s economy worried investors. From an auction perspective, we saw a distinct drop in overall demand from the third quarter.
In an industry well versed in cheery talk about prospects, no-one can claim the property market endured anything other than a bruising 2011. Early last year, we predicted the outlook for the residential market would be perturbing, with a "double dip" in house prices after 2010’s short-lived rise. In December 2010, we also said that for the following 18 months, improvement in house prices would be unlikely given uncertainties about the strength of the economic recovery. In fact, there has been neither an economic nor a property recovery, and it is most likely that this year we will see continued house-price lethargy and contraction. The luxury and leisure residential markets remain the most beleaguered, with entry-level housing being the bright spot on a murky horizon.
Last year, the greatest challenge for the auction industry was attracting buyers who have been oversupplied with non-income-producing and distressed properties. Throughout the year, economic headwinds were strong and low interest rates did little to boost sentiment after a five-year debt binge. The year was also a "game-changer" for the auction sector, with the introduction of the Consumer Protection Act. However, the full effects of these regulations are still to be seen.
Our view in January last year was that the commercial property market would become two-tiered, with prized properties experiencing a surge in demand, while lower-end properties would have less appeal, and this has proved correct.
The volume of vacant office stock continued to rise last year, but began to tail off as few new developments were started. Office block sales were strong in the first two quarters, compared with 2010, but there was a stabilisation in inquiries by the end of the year. Retail property transactions remained robust and yields for prime properties reached 8%, although there was a decrease in demand for smaller retail units and strip malls as more vacant stock came on to the auction block, especially outside Gauteng.
While there was a small increase in the number of inquiries for industrial property, occupier and investor sentiment now seems to have steadied.
Development land continues to be the weakest-performing part of the market, and the downward trend will continue. However, we predict greater numbers of hotels and guesthouses hitting the auction floors this year as the outlook for this sector remains precarious. With deep discounts being offered for land, we may also see land banking grow.
The new Companies Act, which came into effect in May, had a material effect on auctions with the introduction of "business rescue". In the last quarter, the new statute caused a slowing in liquidations as high -value distressed companies opted for the business rescue option. In many instances, this has caused a bottleneck of insolvent companies that have little or no chance of recovery, and we expect a spate of high -value liquidations and auctions when this logjam clears.
Last year saw a spate of distressed houses hitting the market, but the banks are methodically clearing out their inventories.
The real trouble now seems to be with larger banking exposures in areas other than home loans.
In June, we acquired the online motor auction platform, DealersOnline, and despite a turnover of R180m in the past two quarters, we have seen a decrease in motor-vehicle repossessions and this, at a retail level, is a positive indicator.
Last year we also held liquidation sales that included the R720m disposal of the failed Bel Air and Lone Hill shopping malls in Gauteng.
Across every sector, from farms to apartments, luxury homes to aircraft, office blocks to shopping centres, we experienced record-value transactions. This trend shows the auction mechanism is quickly being adopted as the asset-disposal vehicle of choice, as auctions have no price barriers and cut across all price and asset categories.
Distressed sales accounted for 47% of our auction revenue last year, which is of concern to us, but more so for the property market in general.
As we move into our 20th year of operation, we are experiencing a general decrease in demand, which is affecting all sectors.
In summary, the outlook for this year is disquieting.
Quite how bad it will be will depend on myriad global and local issues, but there is no doubt whatsoever that this year will be filled with many challenges and tribulations.
