commercial real estate transaction review south africa march 2015

7/21/2019 Commercial Real Estate Transaction Review South Africa March 2015

1/13

Commercial real estate transaction review:

South Africa

March 2015

Capital Markets research

Commercial property investmentactivity slowed down in 2014.The overriding factor whichcontributed to reduced investmentactivity was the low supplyof investment properties. Theinvestment outlook is unbalancedacross ofce, industrial and retail

properties and will be largelydetermined by what propertiesinvestors are willing to let go of.


2/13

Scope of analysis

This report reviews investmentactivity in the South Africancommercial real estate marketand analyses key trendsobserved from investment salesdata.

Data was sourced from publiclyavailable media reports,research by Real CapitalAnalytics (RCA) and the annualreports of the listed sector,amongst other sources.

This report covers the years2011 to 2014, with specicreference to commercialproperty, including the ofce,industrial and retail sectors,focusing primarily on major

transactions.

The total transactions reporteddo not reect market activitycompletely but present amajority of activity in whichlisted and unlisted majorfunds have either acquired ordisposed of commercial realestate assets with the section ofsmaller sales excluded due tolack of data.

Investment

transaction

analysis

OPYRIGHT JONES LANG LASALLE IP, INC. 2015. All Rights Reserved.

Investments decelerate as propertyowners hold on to value

Commercial property sales decelerated notably in 2014, resultingin a 43.7% y/y decline in the overall investment transactionvalue to R13.8 billion in the year. In line with the overall declinein transaction value, the total number of investment transactionsdeclined from 148 to 112.

The industrial sector opposed the general downward trend ininvestment with a notable y/y increase, even when correcting forthe large sale between Macsteel and Redene.

Although total investment value declined, the total value ofGLA invested in increased during the year. Hence the overallinvestment value declined to R8,524/m in 2014 from R16,145/min 2013. Again, the industrial sector countered the trend showingan improvement in this regard.

Cross border investments showed a marginal improvement from2013, with the growth driven by two large Delta Internationaltransactions.

Economic conditions and new developments might slow the paceof investment activity in 2015. However, the trend is not likely tobe balanced across the sectors.

Summary Ofces Retail Industrial

Transaction value Total GLA

ZAR/m2

Yield Source:JLL


3/13

Nevertheless, the overridingfactor which contributed to lowinvestment activity was the lowsupply of investment properties.Whilst the market continues to havea high number of potential buyers,property owners are holding onto investments as there are fewoptions for reinvesting sales returnsin the current economic conditions.

Yields showed a slight increase

during this period, slightly reducingthe value of properties investedin over the year from a valuationsperspective. However, the increasehas not been signicant enough toconclude that available stock is ofpoor quality assets.

Turning against the trend, theindustrial sector was the only sectorwhich showed an improvement inthe yield, even when excluding theMacsteel/Redene portfolio deal.

The industrial sector outperformedthe ofce and retail sectors inthe growth and average value ofinvestments. Although the economyhas been sluggish, key factors thatdrive industrial activity have seena much better performance in thepast year: trade activity improved,driven by a 13.6% rise in imports,whilst freight activity recorded a9.2% rise, both referring to goodstransported in tons.

Investment opportunities are onthe rise in the industrial sectordespite a weaker performancein the manufacturing sector. Thesentiment might also be that boththe manufacturing and miningsectors have almost bottomed outand are most likely going to showimprovement in 2015 going intothe long term. This is supportedby a gradual recovery in the BER/Kagiso Purchasing Managers

Index which reached 54.2 indexpoints in January 2015. A readingabove 50.0 index points indicatesproductivity growth.

Cross-border investmentscontributed an estimatedR1.5 billion to total investmenttransactions in 2014, marginallyimproved from 2013s R1.4 billion.The listing of Delta Internationalwhich purchased assets in

Morocco and Mozambique in 2014,introduces a unique REIT in SouthAfrica. Its focus on foreign assets,in a slower local market, sets thecompany apart and may begina new trend in the South AfricanREITs. The long term potential ofthe continent promises to see morelocal players seeking value outsideof South Africa.

Credit rating downgrades, aweakening currency and thenationary impact of the reversal ofhe oil price are all factors that mayoster a cautionary attitude amongstasset holders and the uncertainlywould only foster the propertyhoarding as a store of value. Asiderom restructuring operations,property sellers are more likely tobe those ready to get rid of assetswhich are not producing the desiredeturns. This implies that purchasers

may be looking at lower qualityoptions than they would prefer, but athe advantage of obtaining these athigher yields which will work well forassets that need a little work.The long term nature of property

investments warrants a long termoutlook on the performance of theeconomy in order to gauge investorsentiments, and sentiments areunique in the three major commercialproperty sectors. As a result, thewillingness to let go of certain assetswill depend on different factors.

With employment numbersremaining at, the ofce market islikely to remain in over-supply whichhas put pressure on rental rates.This may give reason for investors toput certain properties on the market.

On the other hand, the retail markethas surprised on the up side in2014. Against a 1.5% GDP growth

rate, retail sales at constant pricesgrew by almost double at 2.4% in2014, with Decembers 3.4% y/ygrowth overshooting consensusestimates. Retail growth remainedresilient despite a number of factorsworking against private consumptionexpenditure. Hence the climate looksto be improving for retail investmentsgoing into the new year and retailproperty owners may continue tohold on to these assets.

In the industrial sector, warehousingand logistics activity has grownwith local retail activity and a largenumber of new developmentsmay contribute to opportunisticinvestment deals in vacated older

buildings. In all three sectors newdevelopments might slow the paceof investment activity with capitalmaintaining a wait-and-see attitudeto changes in the market.

The sluggish local market mightsee more investors looking at viableoptions outside of the South Africanborder. However, investors will treadcautiously with a weak Rand puttingSouth Africa at a disadvantage in USDollar quoted transactions. Currency,political conditions and economicconsiderations pose new risks whichinvestors will have to grapple with.

Key

observations

Outlook

The ailing economy was a contributor to lower investment activity during2014. GDP remained benign over much of the year, recording a marginal1.5% (real prices) growth in 2014. Slower economic activity in the presenceof an interest rate upswing only exacerbated conditions in the investmentmarket: the Johannesburg Interbank Average Rate (JIBAR), which guidesthe nancing rate in investment banking, closed at 6.08% in 2014 from5.22% at the end of 2013, following an accumulative 0.75% increase in therepo rate over the year.

The investment climate has not changed signicantly from 2014 goinginto 2015 and this will be a major contributor to investment activity.

Nothing highlights this more than the 2.0% GDP growth rate forecastby the National Treasury, only marginally improved from 1.5% in 2014,which could be revised downward if economic conditions worsen.

COPYRIGHT JONES LANG LASALLE IP, INC. 2015. All Rights Reserved.


4/13

Key facts


Figure 3: Total number of transactions

Figure 2: Total investment transactions value by location

Figure 1: Total investment transactions value by sectorThe loss of condence in theeconomy, and a resistanceby asset holders to sell,contributed to a considerabledeceleration in investmentactivity in 2014.

Commercial property sales recorded anestimated 43.7% y/y decline in the overallinvestment transaction value, to R13.8 billionin the year. Industrial property sales grew inthe period, only made better by a portfolio dealbetween Macsteel and Redene valued atR2.7 billion. Both retail and ofce sales slowedconsiderably, with ofce sales recording a68.7% contraction in the year (see Figure 1).

Focusing on the provincial sales, the provinceswith smaller property markets (all excludingWestern Cape, Gauteng and KwaZulu-Natal)showed a much smaller decline in salesthan the others at an aggregated -5.0%from 2013. However, this would not have

been possible without the Macsteel portfolio,which accounted for 50.0% of transactionsin the smaller provinces combined. The totaltransaction value in Gauteng, the provincewhich accounts for most commercial propertyactivity, declined by 48.0% from 2013 (seeFigure 2).

In line with the overall decline in transactionvalue, the total number of investmenttransactions declined to 112 in 2014 from148 in 2013 (see Figure 3).The industrialsector accounted for the bulk of transactions,accounting for 37.0% of all transaction in theyear.

Source:JLL

Source:JLL

ZARbillions

Sourc

e:JLL


5/13


6/13

Average ofce yields 2012 2013 2014 2015 Outlook

Western Cape 11.6% 7.5% 8.5%

Gauteng 9.8% 8.3% 8.7%

KwaZulu-Natal 10.6% 9.4% 10.5%

Rest of South Africa 11.6% 9.4% -

Source: JLL

1Yields are calculated as an average yield across all recorded transactions. This is a skewedresult when considering prime locations such as Sandton in isolation where yields are lower.

Figure 7: Total value of ofce transactions

Investment in the South African ofce market showed a notable declinefrom 2013. Total transaction value declined to R4.4 billion, a 68.7%contraction from 2013. Although investments in 2013 had been boostedby the substantial purchase of ofce properties by Growthpoint, the total

sales value was still notably weaker than in 2012 and 2011 (see Figure 7)with both having recorded values above R7 billion.

In line with the decline in theoverall transaction value in 2014,there was a substantial decreasein total GLA transferred: from726,937m2in 2013 to just277,636m2in 2014. There wasalso a substantial decreasein the value per square metrefrom 2013 to 2014: whilst ofceproperty sold at an average

of R19,488/m2

in 2013, thisdeclined to R15,981/m2in2014. This is also visible in theyields increasing during 2014,pointing to a reduction in thevalue of properties sold during2014, or even the presenceof opportunistic investments.It is worth noting Arrowheadsacquisition of the Sasol andUrban Brew buildings, both inGauteng. The Sasol buildingwas acquired at a 15.0% yield,currently tenanted by Sasol with

a lease that expires in 2016, butis located in Rosebank which is

a thriving node. Urban Brew wasobtained at an 11.0% yield.Growthpoint continued to be amajor driver of ofce investmentactivity in 2014, accountingfor 44.0% of the 39 ofceacquisitions in 2014. The REITacquired 17 ofce propertiesfrom Abseq, an ABSA subsidiary,following a larger acquisition

in Tiber during 2013, whichincluded 23 ofce properties.

Gauteng continued to be themajor driver of activity in theofce market. The largest dealconcluded in the province during2014 was the Menlyn CorporatePark which boasts a GLA of25,767m2. The property wasacquired by Emira PropertyFund for a total value ofR614 million. The WesternCape saw further tapering in the

size and number of investmentdeals, but continued to hold

stronger value by square metre.In contrast to the general trend,KwaZulu-Natal showed a notable25.8% increase in sales. Thoughstill a small player in comparisonto Gauteng and the WesternCape, the pick-up in investmentactivity, at a time when there is ageneral slowing, suggests a rmestablishment of the province as

a key city for business activity inthe country.

A major challenge to theofce investment marketwas the notable rise inofce developments in keyJohannesburg nodes during2014. The sector is seeing anover-supply in some regions,putting pressure on rental rates.The rise in quality supply couldput pressure on older buildingswhich could become available to

the market in the medium to longterm.

Ofcesector


Source:JLL


7/13

Ofce indicative transactions in 2014

Property Type:

Ofces

Location:

Fricker Road, Illovo

Sale Date:

Q1 2014

Sale Price:

R220.6 million

GLA:

105,832m

Rate (ZAR/m):2,085

Yield:

8.7%

Seller:

Ambit Properties Ltd.

Buyer:

Growthpoint Properties

Property Type:

Ofces

Location:

175 Corobay Avenue,Pretoria

Sale Date:

Q1 2014

Sale Price:

R614 million

GLA:

25,767mRate (ZAR/m):

23,829

Yield:

8.6%

Seller:

Unknown

Buyer:

Emira Property Fund

Property Type:

Ofces

Location:

12 Woodlands Drive

Sale Date:

Q1 2014

Sale Price:

R495.9 million

GLA:

276,893m

Rate (ZAR/m):

1,791

Yield:

8.7%

Seller:

Ambit Properties Ltd.

Buyer:

Growthpoint Properties

Illovo CornerMenlynCorporate Park

Country ClubOfce Park



8/13

Average retail yields 2012 2013 2014 2015 Outlook

Gauteng 10.4% 9.0% 10.7%

Western Cape 8.8% 8.9% 10.2%

KwaZulu-Natal 10.0% 11.4% 10.1%

Rest of South Africa 10.3% 9.4% 10.7

Source: JLL


Figure 8: Total value of retail transactions

The value of retail investments totalled at R5.1 billion in 2014, a dramatic47.6% decline from 2013. Consumer condence and the general economicoutlook no doubt contributed to uncertainty amongst investors duringthe year. Overall, retail sales at real prices showed a marginal 2.4%

y/y growth, with inflation and higher interest rates putting pressure onhousehold disposable income. However, the growth has been stronger thanoverall GDP, reflecting some resilience in household consumption in amore discouraging environment.

At a provincial level, the smallerprovinces (all excluding Gauteng,Western Cape and KwaZulu-Natal) showed a rise in investmentactivity seen in both the numberand value of transactions. Totalinvestments grew by 34.0% ona y/y basis and the number oftransactions by 50.0% in the year.Within these provinces, therewas a visible trend towards the

purchase of smaller malls, somewithin more rural areas. Asidefrom the partial sale of GreenacresShopping Centre and Nonesi Mall,both in the Eastern Cape, andLethabile Mall in the North WestProvince, most acquisitions hada GLA of 10,000m2or less. Thestability of rural incomes should bea concern for retailers and in turnfor retail investors, especially giventhe sluggishness of job creation inthe economy at present.

In contrast, the Western Cape

saw a signicant decline in bothnumber and value of sales.Investments declined by 81.0%from 2013 coming down toR717 million in 2014. With thesale of three major malls, includingSomerset Mall in 2013, it is notsurprising that the average salesprice declined from R23,263/m2in 2013 to R14,883/m2in 2014in the province. The decline from

the 2013 spike can be seen as acorrection to more normal levels,as the 2014 average sales valuewas improved from 2012.

Gauteng investment activityshowed a 44.0% decline in totalinvestment value to R1.17 billionin 2014. Value per square metredeclined to R7,970/m fromR13,454/m2in 2013. The lower

value seen in the traded propertiesis also evident in the increaseof the yield from 9.0% in 2013to 10.7% in 2014. Acquisitionsby Mergence Africa PropertyInvestment Trust accounted for11.0% of total investment activityin the province.

KwaZulu-Natal showed thesharpest decline in investmentactivity in the year, withinvestments more than halvingfrom 2013 at R117.4 million.However, sales quality improved

in the province, with the averageyield declining from 11.4% in 2013to 10.1% in 2014. The provincemay stimulate interest from retaildevelopers as infrastructureinvestment and employmentgrowth boosts retail potential.Nevertheless, new developmentscould further slow the trend inexisting asset sales.

It is worth noting the acquisitionof ANFA Place in Morocco,which was purchased by DeltaInternational in 2014. Thetransaction on its own accountsfor 9.2% of total retail investmentin the year. The investmentwas concluded at a 7.5% yieldcompared to an average 10.1%yield in the local retail propertymarket. Therefore, the acquisition

can be seen as an example ofthe potential quality and long termvalue which local investors couldnd on the content, especially withfewer investment opportunitiesavailable for in the local market.

Looking ahead at 2015, retailproperty owners are likely tomaintain their hold on retailproperty assets. Althoughconsumer conditions are not attheir best with inationary riskemanating from the turn in the oilprice, the rise in taxes and the

fuel levy, retails resilience even inthe worst of times is encouraging.Hence investors are likely to take along term view on their retail stock.

Retailsector


Source:JLL


9/13


10/13

Average industrial yields 2012 2013 2014 2015 Outlook

Western Cape - 12.6% 9.6%

Gauteng 9.9% 10.0% 9.4%

KwaZulu-Natal 10.0% - 9.0%

Rest of South Africa - 10.0% 8.7%

Cross Border - 8.1% -

Source: JLL


Figure 9: Total GLA transacted

Driven by a portfolio transaction between Redene and Macsteel, totalinvestments in the industrial sector escalated to R4.3 billion in 2014,more than ve times the value in 2013 (see Figure 9). The acquisitionof Macsteel properties by Redene accounted for 62.1% of overallindustrial investments in the year. However, even without the largetransaction, investment in industrial property would have increased byan exponential 147% y/y in 2014.

The strong investment in industrialproperty is in contrastto the developments in the sector,with manufacturing activity havingslowed notably over recent years.Nevertheless, trade activityhas gradually strengthened inthis time, driving demand forwarehousing accommodation.

A total of 909,738m2

of GLA wastransferred in the year, up from200,461m2in 2013. The numbermoderates to 366,209m2 whenexcluding the Macsteel/Redenetransaction.

The average investment valueimproved by 44.0% y/y reachingR4,716/m2in 2014. This contrastswith the ofce and retail sectors,suggesting a stronger condencein the long term outlook forindustrial investors. This is further

displayed in the overall decline

in the yield to 9.2% in 2014 from10.2% in 2013, favouring theseller. Despite being partly drivenby balance sheet constraints, itis worth noting that the Macsteel/Redene portfolio acquisition canbe estimated at an 8.5% yield,counter-arguing any notion thatthe transaction has been largelyopportunistic and in favour of

Redene at Macsteels expense.

From a provincial angle, theMacsteel transaction was largelyconcentrated in Gauteng andaccounted for 66.0% of theR3 billion invested in the provincein the year. It accounted for alarger share in KwaZulu-Nataland the remaining provinces.The Gauteng province on itsown accounted for 70.0% of alltransactions in the year. Growingactivity in the logistics industry

has seen Midrand and the

East Rand showing improveddemand for large industrialaccommodation. A number ofnew developments in the provincemight see investment activityslowing for some time to come.

In the Western Cape, just a fewbut notably large transactionsresulted in R539 million overall

value in investments. Whilst onlyone of the Macsteel propertieswas in the Western Cape, itcontributed R180 million to theprovinces total (33.0%), followedby Accelerates acquisition ofthe Shoprite Distribution Centreand Ingenuitys purchase ofthe Tellumat Retreat. Althoughof lesser signicance, EmiraProperty Fund acquired threesmaller properties in the province,building up its presence in theWestern Cape.

Industrialsector


Source:JLL


11/13

Industrial indicative transactions in 2014

Property Type:

IndustrialLocation:

Esson Road, Lilianton

Sale Date:

2014

Sale Price:

R473.3 million

GLA:

73,071m

Rate (ZAR/m):

6,477

Yield:

Unknown

Seller:

Macsteel

Buyer:

Redene

Property Type:

Industrial

Location:

Eastern Cape CBD

Sale Date:

Q1 2014

Sale Price:

R124.5 million

GLA:

56,411m

Rate (ZAR/m):

2,207

Yield:

9%

Seller:

Unknown

Buyer:

SA Corporate RealEstate Fund

Property Type:

IndustrialLocation:

233 Barbara Road, Gauteng

Sale Date:

2014

Sale Price:

R 570.7 million

GLA:

120,277m

Rate (ZAR/m):

4,745

Yield:

8.5%

Seller:

Robor Proprietary

Buyer:

Fountainhead

MacsteelLilianton Facility

Eveready &ContinentalFactories

RoborBuilding



12/13

North WestLethabile Mall, Brits, R194 million

Kopanong Centre, Kopanong, R151 millionKudube Hammanskraal Centre, Hammanskraal, R106 million

GautengMenlyn Corporate Park, Pretoria, R614 millionCountry Club Estate, Woodmead, R475 millionWoodmead Estate Direct, Woodmead, R273 millionSasol Building, Rosebank, R250 millionNicol Main Ofce, R122 millionPeter Place Ofce Park, Bryanston, R113.6 millionCrown Makro, Johannesburg, R346 million

Lynridge Mall, R175 millionFranwell House, Johannesburg CBD, R154 millionCeltis Ridge Shopping Centre, R106 millionMacsteel Portfolio, Gauteng, R1.97 billionRobor, Elandsfontein, R571 million25 Scott Street, Waverley, R107.8 million

KwaZulu-NatalOld Mutual Centre, Durban, R291 millionThe Marine, R196 millionMacSteel Trading, Durban, R121.6 million

Eastern CapeGreenacres Shopping Centre, Port Elizabeth, R508 millionNonesi Mall, Queenstown, R360 millionEveready and Continental Factories, R124.5 million

Western CapeTygervalley Healthcare, Tygervalley, R149 million

Weskus Mall, Vredenburg, R469.9 millionDe Ville Shopping Centre, Durbanville, R226 million

MacSteel, Cape Town, R180 millionShoprite Distribution Centre, Montegue, R147 million

Tellumat Retreat, Cape Town, R124.5 million


Indicative investment transactionsover R100 million

Gauteng

KwaZulu-Natal

Free State

Eastern Cape

Northern Cape

North West

Limpopo

Mpumalanga

Western Cape


13/13

Jones Lang LaSalle ofces

JohannesburgOfce 303, The FirsCnr Biermann & Craddock AveRosebank, South Africa, 2196Tel +27 11 507 2200Zandile MakhobaHead: Research, South AfricaJohannesburgTel +27 11 507 [email protected]

Henry PlayneHead: Capital Markets, South AfricaJohannesburgTel +27 72 763 [email protected]

Tatiana DinwoodieMarketing and PR ManagerJohannesburgTel +27 11 507 [email protected]

www.jll.co.zawww.jllpropertysearch.co.za

COPYRIGHT JONES LANG LASALLE IP, INC. 2015.

This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of

the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we havenot independently veried those sources and we do not guarantee that the information in the report is accurate or complete.Any views expressed in the report reect our judgment at this date and are subject to change without notice. Statementsthat are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materiallydifferent from those implied by such forward-looking statements. Advice we give to clients in particular situations may differfrom the views expressed in this report. No investment or other business decisions should be made based solely on the viewsexpressed in this report.

ABOUT JLL

JLL (NYSE: JLL) is a professional services and investment management rm offering specialized real estate services to clients seeking increased value by owning,occupying and investing in real estate. With annual fee revenue of $4.0 billion and gross revenue of $4.5 billion, JLL has more than 200 corporate ofces, operatesin 75 countries and has a global workforce of approximately 53,000. On behalf of its clients, the rm provides management and real estate outsourcing servicesfor a property portfolio of 3.0 billion square feet, or 280.0 million square meters, and completed $99.0 billion in sales, acquisitions and nance transactions in 2013.Its investment management business, LaSalle Investment Management, has $53.0 billion of real estate assets under management. JLL is the brand name, and aregistered trademark, of Jones Lang LaSalle Incorporated.

For further information, visit www.jll.com.

commercial real estate transaction review south africa march 2015

Documents