Property Sector's Wrestle To Prevent Write-Downs

To ensure value holds up, the listed property sector is putting forward innovative strategies.

- Glenda Williams

Local challenges to the listed property sector have been well reported on. An economic downturn, coupled with an oversupply of space and lack of business confidence, has put the brakes on demand for commercial space.

But despite this, and slowing or declining rental growth, the valuations of physical properties have largely held up for SA’s listed property sector.

“Valuers tend to look through the cycle and use the South African ten-year bond yield as one of their valuation inputs,” says Keillen Ndlovu, head of listed property funds at Stanlib. “They argue that yields have not gone up. When capitalization rates, just like bond yields, go up, then capital values fall.”

While capitalization rates have been stable, Ndlovu says the market is anticipating that they may increase by as much as 50 basis points on average in the next year.

“This could lead to physical property values declining by as much as 5%,” he explains. “That’s still well below the 25% decline that would cause property companies to breach debt covenants with the banks.”