With volatility returning to financial markets, and uncertainty about the global economy widespread, investors continue to seek stable investment opportunities in the commercial property sector.
“The dislocation currently characterising the global equities and bonds markets, is spurring a growing number of risk averse investors to seek refuge in the stable cash flows offered by core commercial assets”, says Auction Alliance CEO Rael Levitt.
According to a report released by global real estate services firm Jones Lang LaSalle, there was $103.5 billion in direct commercial real estate investment globally in the second quarter of 2011, which is up 50% from a year ago.
Levitt asserts that together with the low volatility characteristics of prime investment properties, one of the key drivers of investor interest in quality commercial property is the fact that unlike other asset classes, property is tangible and transparent.
“Whilst renewed economic concerns are challenging investor confidence, the results yielded from auctions in the second, third and fourth quarters of this year, are painting a contrasting picture, with prime commercial assets continuing to be snapped up at competitive prices by investors seeking stable investments”.
Investors are incorporating a variety of creative strategies to avoid additional risk and to make their investments work, and whilst concerns about sovereign debt in the Eurozone and decelerating growth in the US economy has caused significant uncertainty in the real estate sector, Levitt expects demand for good quality properties to persist. “In contrast with the capricious nature of the equities and bonds markets, the returns from commercial property tend to be less volatile; a critical factor which is highly important to risk-averse investors”.
The local equity market has experienced extreme instability in 2011 with three spikes in volatility since the financial crisis in 2008. While the JSE is down 3% since the beginning of the year and the Dow Jones remains flat, the capricious nature of the market does not instill uniform investor confidence.
On a global front, the recent announcement by Mervin King, governor of the Bank of England, that the bank will inject £75 billion into the UK economy in an effort to quell the recession is a poor indictment on the future outlook for the equity market. He comments, “the current financial situation is the most serious financial crisis since at least the 1930s, if not ever.”
The general consensus among economic commentators points to the fact that investors are chasing cash flow as their primary motive. Investors are proceeding cautiously in this market and reevaluating their exposure to equities.
The supply gap for prime assets has expanded within the sector during the second half of 2011. Levitt maintains that investors have grown increasingly selective with their investments, with investor interest focused on core markets, and interest in secondary markets stalling significantly. He expects demand for prime assets in established nodes, where new capacity is being built, to persist. “Rental levels and valuations have held their own in key nodes such as the Sandton CBD, Rosebank, the Cape Town CBD and Century City”.
Placing the auction sector within the context of a wider investment market place, Levitt predicts that the commercial real estate sector is headed for a continued and gradual recovery. Whilst the commercial property sector remains susceptible to market instability, the quality of a property’s location and covenant, will dictate demand and determine how it is priced.