Commercial property lending shifting to nontraditional sectors

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While the majority of SA’s economic sectors have experienced significant challenges in recent months, the commercial property sector has managed to weather the economic and political storms relatively well thus far.

That said, the performance of the SA commercial property sector has traditionally lagged that of much of the rest of the country’s economy, so the general consensus among property finance roleplayers is that a prolonged period of muted activity and low growth is likely to be on the cards. This sector slowdown has already begun, with a significant drop-off apparent in the number of finance transactions for new property developments since April this year.

This challenging growth situation in the sector is clearly evident in the figures provided by the SA Reserve Bank in terms of the growth in the “total stock” of commercial mortgage advances. Figures have declined steadily in recent years, from growth of around 12.5% over the 2015 calendar year to only 8% for the first quarter of 2017.

Perhaps unsurprisingly against this backdrop, the majority of stakeholders in the SA commercial property finance sector have elected to prioritise the quality of their loan books over the volume or value of new transactions written. In Nedbank Property Finance our commercial loan book is in the best shape it has been over the past decade, with client arrears, loan defaults and bad debts well below the bank’s through-the-cycle target ranges. And it’s not just in Nedbank that this apparently counter-intuitive scenario is being played out, as it would seem that other commercial property financiers are experiencing the same.

New commercial property developments. Expect a period of muted growth

New commercial property developments. Expect a period of muted growth

Given the previously mentioned lag in the commercial property finance sector, and the prospects of challenging times ahead, there are few, if any, property finance providers who would not be comfortable to tradeoff low book growth for robust book quality. Having a high-quality book at this stage of the cycle is undoubtedly the most reliable way of riding out any upcoming sector downturns, and of ensuring that one is well positioned to capitalise on the uptick in market activity into the future.

For the most part, this generally good book performance is also indicative of the fact that the majority of stakeholders in SA’s property sector are better able to deal with market down-cycles than they were 10 years ago before the hard lessons of the 2008 global economic crisis.

That’s not to say that development or investment opportunities don’t still exist. The difference today, however, is that many of these opportunities are to be found in areas or niches that would be best described as nontraditional or unconventional. In fact, many of the property subsectors that financiers would previously have been likely to shun due to perceived higher risk, are now coming into their own with attractive return potential.

Interestingly, many of these subsectors correlate with the national socioeconomic development agenda, which is focused on driving sustainable economic growth by delivering on basic social needs.

So, in the coming months and years, it’s likely that we’ll find increasing numbers of astute property investors and developers being less involved in traditional large retail and commercial developments and instead focusing more of their attention on projects in the affordable housing, student accommodation, and health-care sectors, particularly within the so-called hospital “day-care” or “step-down” facilities. There’s even evidence of growing interest in property developments relating to such diverse social components as private schooling, retirement accommodation, frail care facilities and self-storage, all of which tend to piggyback on residential expansion.

While none of these opportunities represents traditional or straightforward property development or finance plays, they most certainly offer promising potential for anyone who has taken the time to understand and fully assess the sustainability of the underlying business operations in the subject properties, and who has thus acquired the insight to be innovative in the way they structure their involvement.

And such capacity for innovative and alternative thinking in the current environment will most definitely be a key requirement for anyone wanting to continue operating in any part of the SA commercial property sector over the coming months.

• Lockhart-Ross is managing executive: property finance at Nedbank Corporate & Investment Banking