Opinion

Last updated: 18th Feb 2011

The Real Estate Investment Sector in developed countries is likely to remain sluggish and lag general economic recovery, whilst emerging economies continue trending upward. The consensus view is that China, India, South America, and Africa are regions where Real Estate markets are recovering quickest and may provide the strongest returns over the next five years.

South Africa (SA) holds significant opportunities for growth, which is attributable to Government’s sustained stimulus efforts and the influx of labour from Africa. SA remains the gateway to Africa and any continental roll out strategy by large international companies, such as Wal-Mart, NTT, and Zara will take place once there are operations locally. This is increasingly more likely in the case of Wal-Mart, who moved a step closer to acquiring 51% of Massmart’s equity after the Competition Commission of SA endorsed the deal on 12 February 2011. The predominant feature of Wal-Mart’s approach is that the acquisition provides a platform to expand into Africa with an existing fully fledged African retail and distribution network (two of the most problematic business requirements to penetrate the African market).

In SA, growth in the Real Estate auction business is a leading indicator that the market is ahead of its European counterparts. Despite the global downturn, the relative strength of SA’s emerging economy provides a strong investment destination that is increasingly more palatable to offshore investors. Forecasts suggest mixed opportunities and growth in the Real Estate market as foreign investors commence operations in SA on the back of a strong Rand and a desire to take advantage of SA’s well-developed infrastructure. This may result in investors chasing industrial, office and retail space. However, foreign investors should remain cautious and vigilant about movements in the Rand, as prevailing currency risk is toward the downside. Investors need to be wary of the currency’s cyclical nature, which can make a significant difference to returns over the shorter term.

Unlike UK and USA, private sector credit extension (PSCE) is trending upwards in SA albeit cautiously, due to growth in household demand. PSCE exceeded expectations in December 2010, rising by 0.9% month-on-month for an annual rate of 5.6%. Household consumption is likely to remain the main driver of credit growth, following interest rate cuts of 6.5% since December 2008, as well as modest income growth and improved employment prospects. However, stricter lending criteria and high debt levels have also prompted consumers to settle their debt rather than apply for more credit. Corporate credit demand is still weak as the private sector is wary of accelerating capital expenditure, given excess capacity and the fragility of economic recovery.

According to Global Property Research (GPR)’s 250 Property Index, SA currently offers the second highest return of 15.0% and less market volatility than its peer-group. These include France, UK, US, and Hong Kong, which offers the highest return of 18.0%. SA’s average one-year return of 28.3% is somewhat inflated due to the unsustainable strength of the Rand towards the end of 2010, compared to the index-mean of 18.0%. Truer to form, GPR’s Property Index places SA at an average return of 14% over five years, almost double the index-mean of 7.2%.

Sergio Mendes
Associate
Bridge Capital