By Robin Lockhart-Ross
Managing Executive Nedbank CIB Property Finance
The results of the annual IPD index for the year ended 31 December 2016, released by MSCI on 12th April 2017, show solid performance from the South Africa investment property sector, which generated an ungeared total return of 11.1%.
Although this was lower than the 13% return achieved in 2015, that result was not unexpected given the low growth environment and the historic correlation between GDP growth and the commercial property index. The fact that direct property not only delivered a real return for investors in 2016, but also outperformed both the equity and bond indexes measured over 1, 3, 5 and 10 years, illustrates the resilience of the sector.
The IPD index is based on data assembled and analysed by MSCI from a sample of 1.450 properties with a total capital value of around R300bn at December 2016, comprising over 60% of institutionally held investment property in South Africa, so it is a reliable reflection of the commercial property sector. It is thus an accepted industry benchmark and important tool in decision-making for both investors and financiers, hence Nedbank CIB’s proud and longstanding association with the IPD index.
The total annual return of 11.6% comprised a steady income return of 8.3% and a lower capital return of 2.6%, which is comforting to Nedbank CIB from property financier’s perspective in the current environment, where stability and sustainability of income flows will be a lender’s priority over growth in collateral value.
Within the overall all-property return of 11.1% the results show some interesting differentials between property segments and shifts versus prior years, most notably that for the first time in many years the retail property sector at a total return of 12.6% was no longer the top performer.
This position went to the industrial sector which generated a total return of 13.6%, driven mainly by strong capital returns attributable to improved yield. The lowest performing sector in 2016 was again offices at only 7.6% total annual return, which reflects the continuing difficulties being experienced due to high vacancies emanating from an oversupply of space.
What was interesting and perhaps even surprising in relation to the retail sector was not only that this was outperformed by industrial property, but also that the top preforming retail property segments as categorised in the index were neighbourhood shopping centres at 20.3% and community centres at 13.1%, by comparison to regional shopping centres at 12.5% and super-regionals at only 10.9%, which have been the top performers in recent years.
This finding was somewhat counterintuitive from our perspective Nedbank CIB as property financiers, as we would have given preference to funding of regional and super-regional centres because of the perceived defensive strength stemming from their geographic dominance and national tenancy, over neighbourhood and especially community centres, which we would have seen as being vulnerable to tenant losses in the face of competition from newer and larger developments.
It is still too early to draw any firm conclusions on shifts within the retail sector as the principal driver of total returns in 2016 on neighbourhood shopping centres was strong annual capital growth, and as total returns on such centres still lag the retail sector over a 10 year annualised basis, but it may well be that there is a change in perception of and appetite for neighbourhood and community centres.
In Nedbank CIB we have been substantial funders into the retail property sector over the past five years, most noticeably perhaps in our financing of several of the recently developed regional and super-regional centres, but also in our financing of rural and peri-urban centres in underserviced nodes that will typically fall into the neighbourhood centre category.
There were no real surprises within the industrial sector, where the top performing categories were high-tech industrial with a total annual return at 18.1%, which was the second best segment behind neighbourhood shopping centres, and warehouses at 12.9%.
These results show the demand of industrial users for modern, efficient space in accessible locations and mirror the development activity we as Nedbank CIB have seen in recent years, where the majority of our new lending has been for the funding of large scale logistics, distribution and assembly facilities in industrial and activity parks.
Similarly it was not unexpected that the office sector would again reflect the worst performance over 2016, with decentralised and inner city offices at total returns of 7.7% and 7.5% respectively being the two lowest performing categories in the IPD index.
The office sector continues to struggle in the face of oversupply in most key office nodes, leading to persistently high vacancies, negative rental reversions and tenant leasing power.
Being cogniscant of these difficulties, we in Nedbank CIB have been most cautious of the office sector in our lending activity over the past few years, entertaining only tenant-driven office developments supported by prelets to substantial tenants, except in the case of listed funds and large developers where we could take a balance sheet view on the developer.
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