Property development under pressure

Johannesburg - In South Africa's property sector the development market – and specifically the residential development market – is under pressure.

Assets auctioned in 2011 were worth R17bn, with failed property developments representing between R8bn and R9bn of this amount, said Auction Alliance chief executive Rael Levitt.

He said 95% of residential properties put under the hammer were being sold by stressed owners.

In contrast, only 16% of commercial properties sold on auction were under pressure.

The commercial picture, he said, could change with the hospitality sector starting to show cracks and many hotels being under duress.

Levitt was one of the speakers at last week's property development conference held by the Investment Property Databank and the South African Property Owners Association in Cape Town.

He said some of the sales were as a result of failed investment schemes and golf estate developments that had foundered after stand sales dried up overnight.

The good news is that since the beginning of the year the number of property liquidations seems to be tailing off and could be arrested further through the business rescue provisions of the new Companies Act.

Last week struggling AltX-listed property development group Pinnacle Point Group [JSE:PNG] was the first company to be the given the option of a business rescue. Pinnacle Point is involved in the Pinnacle Point Golf Estate in Mossel Bay, among other things.

As regards auctions in general, Levitt reckons the price achieved at an auction reflects the proper market value of a property. The auction, he says, is where demand and supply come together.

A good example is the super luxurious penthouse in Mouille Point in Cape Town recently auctioned for a record price for the area of R46.78m. He said the property had been in the market for R80m for more than a year, but had not sold as the price was excessive.

The amount subsequently paid amounted to R45 000/m² and can be regarded as the market rate. He said that for an area regarded a Cinderella suburb five years ago, this was not to be sneezed at.

There are about 950 registered operators in the auction industry, 180 of whom are active. An estimated 4 000 employees work in the auction industry.

Based on value, the biggest auction category is commercial property (55%), followed by residential (15%). The estimated gross value of assets sold in 2010 was R17bn.

Insolvency auctions increased to 22% in 2010 from 19% in 2009, while bank-related auctions declined to 18% in 2010 from 27% in 2009.