Market Research

Auction Alliance's Commercial Research Report

March 2010

Welcome to Auction Alliance's March 2010 Commercial Research Report, giving an analysis of recent auction activity in the South African commercial property market.  This month we focus on the February 2010 results, and also reflect on confirmed yields measured over the 2009 period.

Although key valuation measures showed further signs of distress in the general marketplace, confirmed and unconfirmed yields remained unchanged. Sales volumes continued to increase, but on the back of an escalating supply trend.

The key findings from February 2010's results include:

Supply: A total of 57 commercial property lots were placed on multiple auctions in February 2010, a figure that shows a 90% year-on-year increase.  The supply trend continues to show an increase, with February's total growing by 21% month-on-month. Commenting on the current market dynamics, Norman Raad, Commercial Director at Auction Alliance says: "Investment opportunities akin to those experienced in 2007 will abound in 2010, and this will no doubt bring about much needed market stimulation. For the past few years, we have seen demand exceed supply, and this will soon change. If you are thinking of investing in the property market, then now is the perfect time - the more cash you have available, the more opportunities will come your way."

Demand: Demand and sentiment were noticeably stronger during the month of February, whilst the number of confirmed sales increased month-on-month.  In addition, a number of new key measures, brought about through Auction Alliance's new online operating system, also showed strong signs of renewed activity, including an increase in the number of registered bidders and the number of web hits per property.  Although the confirmed national average sales rate dipped below 50% in February, this was brought about by a typically tougher trading period and supply that tends to be carried over, which further distorts the reported sales rates.  After bottoming out in July 2009, it is estimated that sales rates will continue an upward trend as banks start seeking new opportunities to grow their loan books.

Yields: There were few yield-based transactions in February to analyse, but discussions with Auction Alliance's brokers revealed that current yields for good properties can typically range from 9,5% to 11%, whilst inferior quality stock is typically trading from 12% and above.  The following graph shows all confirmed yields scattered over the 2009 period - it shows that the average yield and yield spread remained steady throughout the year.  Separating yield performance between operating regions, shows that whilst Gauteng and KwaZulu-Natal are showing signs of softening yields, Cape Town has shown signs of yields firming for prime property.

February Commercial Research

Welcome to February's commercial research report giving an analysis of recent auction activity in the South African commercial property market.  Our first publication for the year has been split into a broad overview of 2009's performance and a brief outlook on what may lie ahead for buyers and sellers of commercial real estate in 2010.

2009

The key findings for 2009 are:

• 522 commercial property lots were placed on multiple auctions (down 26% from 2008);
• The national average sales (confirmation) rates fell to historic lows due to the downturn in the commercial property market and bounced below 50% several times during the year. However, regional peaks were recorded during the second half of the year, in June and September, at 66% and 75% in Gauteng and KZN respectively (indications of a turnaround?);
• Confirmed yields softened marginally and ranged between 8% and 13% (national average for 2009 recorded at 9%), suggesting that prime properties offering strong cash flows are still fetching good prices (a safe-haven in times of economic uncertainty?);
• The average unconfirmed yield (rejected offers) softened to 15%, suggesting a widening gap in pricing and risk assessment between that of prime and non-prime property (two-tier market);
• The average reserve / price variance was 21% (an indicator of the margin between the seller's minimum requirement and the final price achieved), but narrowed significantly from June's monthly high of 34% to as low as 6% in the latter months of the year.  This suggests a growing sense of realism towards the tough market conditions experienced.

All indicators suggest that activity in the commercial auction market for 2009 was a tale of two halves. The first two quarters showed a plunge in almost all key commercial market measures, whilst the second half showed clear signs of a recovery in activity levels but at softer prices.  Although we identified the first signs of an end to boom conditions in mid 2008 when land prices fell out of bed, the reality of the emerging property recession was only felt later during the first half of 2009 when credit availability became extremely scarce and buyers adopted a 'wait and see' approach.  During the first quarter the market literally 'froze'.  Whether this period will represent the start or end of a 'blow off' phase in asset bubble trends is yet to be established.

The second half of 2009 showed significant improvement in activity levels, slightly firmer yields and a narrowing reserve / price variance.  An encouraging finding is that this was also on the back of a sharply growing supply trend.  See Graph 1: Total No. Lots (2009)

Key findings on the total number of lots:

• The highest recorded monthly volume (77 in November 2009) is still below that measured at the peak of the commercial cycle (84 in November 2008);
• The supply of property hitting auction floors grew by approximately 10% per month;
• During the noticeable spike in volumes over the last quarter, sale rates continued to increase, whilst the reserve / price variance narrowed further.

The story for the second half of 2009 is that even though supply is consistently increasing, activity has continued to grow and sentiment has improved.  In addition, the reserve / price variance (which has hit an all time low for 2009 at 6%) continued to narrow.  In our previous edition, we noted that the spread of this margin moved to levels as high as 35% during times of extreme uncertainty.  The narrowing of this spread therefore suggests that sellers are becoming more realistic with their expectations (an 'exiting' of the denial phase), thus affording buyers the opportunity to secure a much wider range of commercial properties looking into 2010.

2010

Whilst we move into 2010 with a growing sense of optimism and further signs of a global economic recovery, it's important to remember that real estate bottoms can be long, drawn-out affairs with many false starts.  As an example, home sales in the US market have experienced four such false starts since starting their downturn in 2007.  There's also a big difference between sales volumes and sales prices along with the timing of their respective bottoms.  Historical evidence has shown that a recovery in price can lag a recovery in activity by as much as 13 months.

Placing further pressure on a sustained recovery is a number of other key commercial property fundamentals, which are still showing signs of weakness.

These include growing vacancy rates, softening capitalization rates, falling rentals and the growing supply of incomplete, over-funded, property developments which now lie dormant in a 'wait and hope' approach by lenders.  These types of large-scale projects, in our experience, can take up to 2 years before being liquidated and their impact on the land market is yet to be fully realized.  Also of concern is the large number of sectional title commercial properties that were purchased towards the end of the boom that were priced, valued and financed purely on a comparative sales method of valuation.  Now that cash-flow is everything in making a deal work, when loans are reset and re-valued on the basis of income capitalization only, potential write-downs on their values may lead to further distress selling.

A highly theoretical view on the outlook for 2010 could therefore be that of continued recessionary conditions, BUT also the start of fantastic buying opportunities.  A recent property prediction paper published by leading UK property group, King Sturge, says:  "2010 will be a boom year for commercial property investment - the best returns for four years - but is it a false dawn? Total returns may well stay positive but capital values may fall again by 2012." Bear in mind that the UK market tends to track ahead of South Africa so this may be our tale for late 2010 or possibly even 2011?

But looking more positively at 2010 one cannot ignore the fact that we are only commencing our journey into an environment which will be shaped by two unique events.  Besides the positive sentiment and potential foreign investment linked to hosting the world's most spectacular global event, never before have such extreme measures and intervention in world markets been taken by governments.  The impact of such events may well defy the most obvious outcome (much the same way world equity markets have defied fundamentals).  Will the gateway to Africa be discovered, bringing with it new investment?  Or perhaps the excessive printing of dollars will lead to a mega-inflation scenario, forcing investors to invest their cash into hard assets and equities?

As we know, it is impossible to accurately predict the future of the market, but one thing is for sure, 2010 is set to offer plenty of opportunities for both buyers and sellers (on the auction floor).  Because remember, the "market" has done and is doing what it is supposed to do - price discovery - and the fact that a lot of prices these days are being discovered through auctions is just part of that process.

All the best for 2010!

Research in November

Welcome to November's commercial research report giving an analysis of recent auction activity in the South African commercial property market. After analysing the results of our September and October commercial multiple auctions, this editions key findings are:

• The average Sale Rate increasing moderately on the back of the total number of lots taken to auction increasing by 91% (August to October);
• A significant drop in the average Reserve / Sale Price Variance, an indicator of the margin between the seller's minimum requirement and the final price achieved, from 24% to 6% ;
• Confirmed yields firming to the 9% - 12% range; select properties surprising market analysts with yields around the 8% mark.

These indicators all suggest that activity in the commercial auction market continues to increase as we move towards the closing of 2009.

October is traditionally the busiest month on the auction floor so, in this edition, we analyse the total number of commercial lots placed on multiple auctions over the last 12 months plus the preceding 2 months (August and September 2008) when the fallout of the credit crisis began.  The adjacent graph, Total No. of Lots, clearly depicts the "freezing" and "thawing" of the market over the period under review.  The latter months of the study period may also indicate the growing level of distress in the commercial market.  An important finding, however, is that the total number of lots remains below the volume measured at the peak of the cycle in 2008, suggesting that the market is not saturated to an abnormally high level.

After further analysing the supply trend together with our key findings above, it is interesting to note that even though the total number of lots has rocketed (91% over the last 3 months), Sales Rates continue to increase, while the Reserve / Price Variance has diminished further.  This implies that activity continues to grow even though supply is consistently increasing, both trends being a positive sign in the re-awakening of the market.

The narrowing of the 'Reserve / Price Variance' (which has hit an all-time low for 2009 at 6%) shows that seller and purchaser price expectations are finally moving towards a place of meeting again.  In our previous edition, we noted that the spread of this margin moved to levels as high as 35% during times of extreme uncertainty.  The reduction in this figure now indicates that sellers are becoming more realistic with their expectations, thus affording buyers the opportunity to secure a greater range of commercial properties than seen in the earlier parts of 2009.

Finally, average initial yields for the latest recorded months (September and October) firmed moderately.  In addition, an unanticipated re-emergence of single digit yields was noted at the October auctions in both Johannesburg and Cape Town.  This shows a strong appetite for prime properties which can offer stable income streams during times of uncertainty.  The lowest average yield was again experienced in Cape Town at an average of 9%.  Johannesburg followed at 10% with Durban holding steady at 12%, few yield based transactions being noted there.

Total No. of Lots

Welcome to October's commercial research report giving an analysis of recent auction activity in the South African commercial property market.

After analysing results for the first 8 months of 2009, the key points are:

• The bottoming out of sales rates;
• The marginal decrease in the reserve / sale price variance (an indicator of the margin between the seller's minimum requirement and the final price achieved);
• 56% of all property sold was vacant; a possible reflection of where real opportunity exists;
• An emerging trend of increased sales rates for higher-value, prime stock;
• The average selling price for all tenanted property sold in 2009 climbing to R7,5 million;
• Confirmed yields for August holding steady at the 10% - 14% range;
• The average unconfirmed yield for August firming marginally at 15%.

All indicators suggest a marginal improvement compared to records from late 2008 and early 2009.  While there appears to be increased activity in the market, commercial property sales performed poorly when compared to 12 months ago.  Generally, sales rates in 2009 have remained at their lowest levels since the previous property market downturn, suggesting we are still firmly in a recessionary market.  The national average sales rate for August (last recorded month) has, however, increased slightly with a 67% hit at the June multiple auction in Johannesburg, a record high for 2009.

The low sales rate has largely been due to limited credit supply and extremely selective demand patterns (a function of credit supply).  The income and tenant profiles as well as the property location have become key factors determining price and the availability of finance.  However, it is interesting to note that, although properties that are not highly rated regarding these factors are receiving softer yields, 56% of all property sold in 2009 has been vacant, reflecting both the current commercial market climate of increased vacancies and the growing level of distress and corporate liquidations.  The high percentage of vacant property sold may also be a reflection of where real opportunity exists and hence demand.

There is also an emerging trend of increased sales rates for higher-value, prime stock.  We are finding that dependable cash flow and strong covenants are attracting the highest prices and strong yields.  Whilst only 44% of all property sold in 2009 thus far was tenanted, the average selling price was relatively high at R7,5 million with a number of confirmed sales noted above R30 million.  The purchaser profile for such property has generally featured high net worth individuals who are not restricted by tight credit policies.

Commercial property sub-types featuring the greatest level of activity for the first 8 months of 2009 are lead by the stand-alone retail sector, comprising 17% of total properties sold.  Industrial warehousing was the next best performer at 13%, followed by blocks of flats (11%) and CBD office and non-CBD prime office (10%).

Our last research report identified the emergence of increased market activity (a process of "thawing") and new, higher required return levels.  This trend appears to continue.  The average reserve / sale price variance for August has decreased by 10% (month on month) to 24% but is still hovering within a range of 20% - 30% (averages for 2009 to date) as depicted in the graph below.  This is significantly improved compared to those recorded during the turning point of the market in the latter months of 2008 when extreme volatility and frozen credit markets resulted in far higher spreads (above 30%) and greater unrealistic seller expectations.

Although the data sample of income generating properties reduced moderately over recent months, average initial yields for the latest recorded month (August) remained steady, holding back from their softening trend over the first two quarters of 2009.  The lowest average yield was again experienced in Cape Town, at an average of 10%.  Johannesburg followed at 12% with Durban recording the top average yield of 14%.

Welcome to the first edition of our national Commercial Catalogue

Welcome to the first edition of our national Commercial Auction Catalogue, another pioneering product from South Africa's leading auction, asset sales and services company, Alliance Group.  In addition, we welcome our newly established unit, Alliance Research, a service that has evolved through the integration of our valuation and auction activities.  We are confident that it will better equip our clients to create further wealth and value.

The prices of properties sold at auction may give us greater insight into the level of prices required to sell commercial property on the market today.  After all, auction activity is perhaps the only area of the property market that has increased over the past year.  Traditional valuers and property economists use historic data and, in a market that is changing quickly, auction data is immediately accessible.  One key advantage of analysing auctions to arrive at a market valuation price is their timeliness.  Auction prices provide a useful guide on where the true market values may lie and Alliance Group will now provide regular, accurate and innovative sales and auction activity reporting to facilitate decision making.

We will provide the property industry with an insight into a market often plagued by limited, poor and outdated property data.  With unique reporting technology at our disposal, Alliance Research has been hard at work designing a sound online database system offering the flexibility and features that will elevate both our clients and team to best-of-breed players in the property industry.

Effective Price Discovery and Other Important Variables

So, by how much have property prices really fallen?  When will the property market bottom?  Are there any buyers out there?  Is it time to buy?  Where are the best opportunities?  At what return?

Market participants search for answers to these questions in the wake of the destruction of global property prices and, in turn, generations of wealth.  We believe the market is calling for insightful leadership that recognises the value of effective price discovery.  We aim to provide this through the distribution of property auction information and the very latest data available on the property market, by offering an innovative property advisory and reporting service and taking property risk assessment to the next level for both industry participants and market players.  Whether you are selling, buying, financing or valuing, you need a firm understanding of movements at the coalface of the market.  This is your opportunity to "read the game" and, through being an informed player and industry professional, become "ahead of the game".

The Alliance Group has been a market leader and promoter of transparent price discovery since the successful establishment of South Africa's first multiple property auction platform in 1998.  Auctions have since proven to be an effective market clearing mechanism in South Africa and continue to grow on the back of successes in Australia, USA, UK and most other established economies.  Each month, as many as 500 residential properties and 100 commercial properties change hands under the fall of Alliance Group's hammer nationally.  Considering our country's thin trading volume of commercial property, one may argue that this market is best tracked by following the higher volume, information-rich, auctioning method of sale.

Turning Data into Valuable Information

Using online technology and mobile reporting, Alliance Research adds real value by commoditising property auction data.  Our valuers identify property transactions, understand the specific circumstances surrounding them and capture the pertinent data variables associated with the transaction.  The data is cleaned by our research team and tailored to your needs, packaged in a variety of mediums.  Our asset information has national reach and currently covers 21 distinct commercial asset types including industrial (high-tech and high/low grade), offices (CBD and non-CBD), retail units, shopping centres, blocks of flats, hospitality properties and vacant land of various uses, among others groupings.

MARKET ANALYSIS

At What Return?

Now that we are firmly established in a buyer's market, in this first issue, we focus our attention on commercial yields; those both achieved (confirmed sales) and offered (highest rejected bids).  For the purpose of this report, we have analysed a national sample of 343 commercial properties taken to auction during the period 1 September 2008 to 1 August 2009.  Outliers (such as those offering development potential) have been stripped out of the sample group while expenditure profiles have been adopted, appropriate to each commercial type.

Initial yields for all confirmed sales are illustrated by scatter points in Graph 1 below.  The initial yield trend for these sales is depicted by the red line and represents an average which increases from 9.0% to 12.5% over the period while individual figures are noted ranging between 6% and 17%.  The blue line provides additional data, displaying the potential initial yield trend determined by unconfirmed sales (highest rejected bids) on our database.  Similarly, an increase from 11.5% to 17.5% is evident, with initial yields ranging between 8% and 28% noted for these bids.

Our analysis shows that the returns which buyers have sought have increased steadily since August 2008, which is in line with general market conditions and sentiment.  Furthermore, a clear 3% - 5% return variance between what a buyer has been willing to offer and what sellers have expected to receive is discernable. The lowest yields were experienced in Cape Town at an average of 10.79%.

Durban followed at 11.81% with Johannesburg recording the top average yield of 12.61%.  A national average of 11% was noted for the period measured.  It is important to note that the below analysis does not separate between the various commercial subtypes, and therefore caution should be exercised when using these yields to justify capitalisation rates on individual properties.  Thus, our study rather shows a more general overview of how the broader commercial property market conditions have changed over recent months.  Our future studies will however focus on the main commercial subtypes individually.