The “secondary market”, being pre-owned commercial buildings as opposed to new developments, is the focus of JLL’s annual 2017 Investment Review, covering the three commercial real estate sectors: office, retail and industrial. It goes without saying that the real estate investment is much bigger than the transfer of existing assets, yet there is much to gain from seeing the patterns of these property transfers. In this article we’ll briefly cover two.
The first is the attitude of investors to such buildings which can be viewed both from the buyer’s and the seller’s side. Focusing on the asset-holder/potential seller’s side, it is encouraging to see the decline in distressed sales which can distort market averages due to the “discount” nature that these sales take. This can result in average initial yields being higher than they truly should be, in a sense under-valuing the market, as an example. Over 2015 and 2016 there was a rise in portfolio transactions and some “bargain” deals for REITs with high cashflow to take advantage of. 2017 saw a general decline in activity in the secondary market, one reason for this slowdown in activity is that asset holders are comfortable enough to maintain a hold position on their properties and are not under pressure to generate liquidity. This is a good sign from a business confidence and economic outlook perspective. It tells us that despite the challenging times, investors are less concerned about cash flow. Asset holders may also be anticipating improving occupier demand as economic prospects improve.
Another important reason for declined activity in the secondary market is that these assets contribute to the identity of the cities they are in, they play a part in painting the character of a city and providing a base that can be used as a measurement of how the city is changing.
In a JLL report titled World Cities: Mapping the Pathways to Success, Johannesburg is clubbed with “Mega-hubs: large emerging cities who attract corporate activity” such as Mexico, Moscow and Mumbai amongst others, while Cape Town is grouped with “Hybrids: small cities that cater to specialised markets” such as Dubai and Warsaw. Indeed, South Africa has seen the most real estate investment in the three cities of Johannesburg, Cape Town and Kwa-Zulu Natal with Johannesburg accounting for the most real estate transactions in any given year. However, looking at the top ranking 15 transactions by value (five from each asset type: office, industrial and retail) Cape Town accounted for 60% of these in 2017, followed by Kwa-Zulu Natal (27%) while Johannesburg trailed at the end with 13%. Although far from being a trend, this illustrates some of the dynamics which could change a city’s profile to potential investors and occupiers.
In the 2017 transaction review, we build an outlook for activity in the coming year, also considering the impact of new developments in the real estate market. 2018 has begun with more confident asset holders, continued developer confidence and an improvement in economic prospects to complement both these factors. Competition between South African cities is tightening, with each one playing to its own strengths. Instead of seeing this as a concern, it should be viewed as something positive: the combined strength of South African cities develops a strong country profile which is important in a globalised world competing for multinationals.