The big bubble debate

The firm which is arguably the world’s largest Real Estate consultancy- Knight Frank notes that the global property market operating fundamentals prevalent this year are looking set to persist in the mid-term: vacancy rates could move upwards; prime rents are likely to grow at a slower rate (or more likely fall) and ultimately yields on property investment generally come under downward pressure. Knight Frank underscores the pressures on the “global economy” and the deleveraging and “repricing of risk” which is going on in global capital markets and its attendant banking system and is projected to stretch throughout 2009.

On it’s part, the Global Property Guide expects 2009 to be “a deeply unpleasant year”. It notes that research shows that house prices are most affected by three influences: economic growth, momentum, and interest rates. Unfortunately, all these 3 influences are moving in the same direction – downward.

• Economic growth. The deep recession now beginning will have strongly negative effects on house prices. Not only do people have less disposable income, but the uncertainties are pushing them to raise their saving rates – leaving less money available for spending on houses.
• Expectations and price momentum are strongly down in many major markets. People tend to derive their impression of what is likely to happen to house prices, from neighbours and from the news, and the news is bad. This increases the likelihood that things will, actually, get worse, on the (well-established) basis that one of the strongest predictors of property price movements in Period T, is what happened to property prices in Period T-1.
• Interest rates. Base rates have been reduced, but mortgage lending rates have not fallen.
  

 

Africa and Nigeria
Though the countries of Africa vary widely, Nigeria has more than just population to point as being central to averaging. The political stability of the continent appears to be improving and its economies are generally growing steadily. Africa recorded GDP growth of above 5% in each of the last three years, helping to encourage improved levels of foreign direct investment. This has aided the development of the continent’s commercial and residential property markets, which are gradually evolving as they adapt to changes in occupier demand.

Many African cities have experienced improved demand for office space during this period of expansion, most notably in those countries whose economies benefit from growing oil and energy sectors. Commodity exporters have also seen marginal growth. Banking and government occupiers are also key sources of demand for office space. In many cities, development activity has shifted away from traditional Central Business Districts to emerging business districts able to offer more secure and modern office accommodation.

Retail markets are developing across the continent. Though much retail activity continues to be focused on traditional street trading and markets, there are new modern shopping centres being developed in many countries (for instance featuring shops held by Shoprite Holdings of South Africa – which exists in 16 African countries including Nigeria and now posts revenue of US$2.4bn) catering to the needs of the growing middle classes.

Demand for high quality residential accommodation varies between countries, and is often driven by expatriate communities and, in some cases, by the increasing wealth generated by the commodities markets – now under some threat as global prices soften.

Nigerian and similar sub-Saharan African gross rental yields are estimated to have fallen from 10% to 5% over the past 18 months, according to Global Property Guide research. Similar emerging market property that was undervalued 18 months ago in fundamental terms is no longer considered thus. All this brings concern for existing holders of real estate investments, but also offer tremendous opportunities for new investors stepping in at a lower end of the curve.