WIN!
Join our Facebook Group
to enter our monthly draw

Auctions

March sales reflect commercial property upswing

Auction Alliance achieved the biggest result in the last 14 months at its March 2010 commercial property sales – raising over R260million with a success rate of 69%. According to Alliance Alliance’s chief executive, Rael Levitt: “A total of 88 property lots were offered to the market in March, which sold at an average value of R11,6million”.

The largest property lot was the Cape Castle Hotel in Green Point, Cape Town, which sold for R63million, reflecting strong demand for prime hotel sites. “A further three hotels were confirmed on our auction floors: the United Hotel in Midrand was sold for R27,5million; the La Splendida Hotel in Mouille Point was sold for R28,6million, and the Harbour House in Hermanus was sold for R19,8million,” says Levitt.

He further notes: “Despite some recent negativity and poor press about the local hotel leisure market, we experienced surprisingly strong demand for key hotel sites and as a result we plan to bring several other prime hotels to the auction block. Several sellers of hotels are from overseas and are using the strengthening Rand as an indicator that it is opportunistic to sell local property and convert the proceedings into offshore currency. This is fuelling the supply side of our business.”

Auction Alliance has confirmed that a further 15 properties were sold for over R10million, undermining the perception that larger properties are more difficult to sell. In fact, explains Levitt, “March has showed us that there is now strong buyer demand nationwide for high value industrial, retail and office properties. Purchasers are looking for real estate with strong cash flows and this was emphasised by the sale of the Midrand University Campus, which we sold on behalf of Media 24, for R33million. The well known Dizzy’s Cafe building in Camps Bay, which is a fully-let retail property with an income of R2,4million, was sold and confirmed for R26,95million, reflecting a net yield of 8,1%.”

With packed rooms in Durban, Johannesburg and Cape Town, Auction Alliance saw the most competitive bidding in over two years and the increased confirmation rate highlighted the fact that there is renewed interest for quality stock as investors recognise the benefits of property investment as opposed to keeping their cash in the bank. According to Levitt: “The hunt for quality commercial property is now stronger than it has been since 2007, and at our Johannesburg sale, held in Sandton, we confirmed 13 properties on the fall of the auctioneer’s gavel. We haven’t experienced this level of immediate on-the-floor confirmations since 2007.”

The largest South African auction group, Auction Alliance had around a dozen lots where there were 15 to 20 parties trying to outbid each other. “As there can only be one winner, there is a lot of unsatisfied demand in the market for lots that offer good quality long-term income. The pricing for the really good quality lots remains firm and the battle for these investments was marked. Holding cash is at present an unattractive option for many investors, and in particular our investors continue the hunt for good quality stock,” explains Levitt.

He says that overall buyers are being very selective about what they buy: “There is a perceived weakness in the market for properties with uncertain tenant covenant, poorer location or shorter lease length. The yields on these kinds of properties soften very quickly, and as a consequence, most often, we were left with a few of those at the end of the day. Although the cash in the market is considerable, buyers are exceptionally discerning and are chasing the properties that offer a better return on investment.”
Other notable lots at the auction group’s March sale included a vacant industrial property in Longmeadow, Johannesburg, which sold for R12,1million at a projected yield of 9,4%, a 26-hectare vacant industrial site for R8,63million, and another vacant 9 200m² warehouse in Queensmead, KwaZulu-Natal, which sold for R8,35million. “There seems to be strong buyer appetite for prime, yet vacant, industrial property and sites. This is a positive trend in a market which is searching for cash flow,” notes Levitt.

Another market that he has highlighted, is the relentless demand for apartment blocks, which is reflected across the country with the auction sales of eight apartment blocks in March: “In St Georges Street in Durban, Auction Alliance sold a 24-apartment block for R4,79million, in Hillbrow we sold the Heatherdene Flats for R7,26million, and several smaller apartment blocks for prices ranging between R1,2million and R6,8million. Auction Alliance’s success rate for apartment blocks across South Africa lies at an impressive 92%, and this seems to be an investment class that attracts massive interest.”
While many people see 2010 as a tale of two halves, Levitt believes that excellent prospects are expected for the commercial property market after the FIFA Soccer World Cup 2010 event: “March is a great indicator that whilst prices have not increased, market activity is getting stronger after every auction.”

He explains that after the 2008 global sub-prime led crisis, the majority of banks were biding time and concentrating on managing their various bad debt provisions: “Since the banks were not aggressively lending and were playing a ‘wait and see’ game, the lending criteria changed and access to loans became substantially more challenging. Now, financing channels have opened up and whilst new clients have to come up with more equity, at marginally higher lending rates, this is bringing stability to the market.” The Alliance house view is that the outlook for the second half of the year remains extremely positive.

By mid-2010, Levitt believes that there will once more be the kind of investment opportunities that astute investors took advantage of in 2004 and 2005: “There is no doubt that increased buyer demand will bring about much needed supply side market stimulation. The seasonally adjusted real GDP, which showed an annualised rate of 0,9% growth in the last quarter of 2009, compared with decreases of 7,4% and 2,8% in the first and second quarters of last year, reveal that the commercial property market will slowly claw itself back to good health.

“Now that the market has settled down and investors are looking to the post World Cup period, we are seeing a healthy bounce in the market, particularly for buyers who are able to find great value. Buyers are now able to pick up good commercial property deals again, which offer great returns. Quite simply, sellers are getting realistic and accepting prices that they wouldn’t a year ago. Our message has been quite clear since the beginning of the year – If you are thinking of investing in the property market, then now is the perfect time,” he explains.

Levitt notes that with the double whammy of cheap financing and lower prices, the more cash investors have available, the more unique opportunities will come their way: “It’s almost like the good old days again – if you have access to cash, you are a powerful investor and brilliant cash yielding investment opportunities are abounding like never before.”

Although the property market has not recovered fully from the recent recession, Levitt says that there is definitely an increase in commercial property trading: “Our auction floors are picking up serious renewed sales activity in terms of various funds offloading and buying property. With the banks either pressurising distressed debtors to sell or facilitating new financing deals again, we are seeing a resurgence of property trading. This indicates very positive trading signs for the commercial property market, and Auction Alliance’s March results are certainly reflective of these indications.”

Levitt explains that key players in the commercial property space are often well informed, seasoned specialists in their industry and what is currently clearly evident in the current auction catalogues, is a discerning approach from existing and newcomer quality investors and developers alike, as to where their money can be best utilised, and what the returns are from stable, long-term tenants..

He notes that investors are looking for assets to complement their business activities or portfolio, rather than merely searching randomly for anything up for sale. “The simple reality is that the world and South Africa are over the worst of the global recession, and the post World Cup period can only bring further exposure, further stability and further opportunities for our country,” Levitt concludes.