The increasing globalisation of the real estate sector is likely to have a significant and positive impact on the South African market. Yield compression and rising interest rates in the more mature real estate markets of the United States and Europe has meant investors are looking further afield to invest their capital.

Many investors have been drawn to Asia, a market which has undergone considerable change and experienced rapid growth over recent years. The attractive returns and strong market fundamentals currently seen in the South African real estate sector would suggest this market has the potential to successfully compete for capital against Asia over coming years.

Economic growth, low inflation, stable interest rates, growing incomes and a burgeoning middle class have created an attractive environment for real estate investors. As a result, strong returns have been realised over the past three years - South Africa was the top performer in terms of total rate of return (average 34,2% per annum over 2004 to 2006) in a Global REIT report undertaken by Ernst & Young. The ease of access to South African real estate should be very appealing to foreign investors, particularly as local restrictions have caused barriers to entry in some other emerging markets (e.g. Indian FDI rules).

International property specialists and private equity consortia will consider South Africa a market with significant value to unlock from property rich corporations and government. If precedents from Europe and the USA are followed, corporations with substantial real estate portfolios will be under threat from buyers looking to crystallise the value of real estate not fully recognised in the share price at which the companies are currently trading.

The large number of listed real estate vehicles provides investors with choice, something not currently exploited by foreign capital (foreign investors comprise approximately 2% of the listed sector). Attractive market characteristics will, over time, lead to foreign institutional investment in the best performing vehicles and subsequent consolidation in the sector. The increase in property securities funds with global real estate mandates is creating demand for well managed, liquid vehicles in most REIT jurisdictions, including South Africa.

In summary, South Africa’s real estate market is approaching a very exciting phase in its development!

Andrew Stainer

Deutsche Bank

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Dubai has come to town, in a manner of speaking, with the massive foreign purchase ($1 billion) of the V&A Waterfront property in Cape Town.

This acquisition and the various other large, foreign-led property developments all over South Africa signal a new and exciting climate for local real estate.

What is certain though is that following the London & Regional/Dubai World purchase, the world has now suddenly been forced to stand up and take notice of what is happening here in South Africa.

This is a good thing for many reasons. Even the skeptics and cynics must agree that the expertise which the worldly and experienced international developers will bring can only benefit the local real estate market and enhance and sharpen the skills of local practitioners.

Increased competition for South African assets will result in higher prices and consequent lower yields on invested capital. This results in general lowering of capital costs which, in turn, allows more speculative development activity due to the “cheaper” money available in the market.

In hot pursuit of respected foreign developers are more of their fellow countrymen as tourists to our shores. They feel more “at home” after their compatriots have established real estate roots.

These tourists may also invest in South African businesses and buy holiday homes which help to further leverage off the initial investment by the developer and boost the local economy.

Previously unseen international retailers like to follow successful international developers. This will serve South African shoppers well as their options will be further enhanced.

In addition to international developers, the large asset managers have also hit town in search of our relatively high yielding listed property shares. Firms like Cadillac Fairview of Canada, CSFB, Henderson’s Global, Franklyn Templeton and other well known players in the listed real estate space are dipping their toes in the water and looking at building sizeable stakes in the larger, more liquid South African property stocks.

South Africa forms part of their “international” or “emerging market” focus and with the Western world in search of YIELD to fund the pensions of the “baby boomers”, stocks like Growthpoint, Hyprop and Redefine are being targeted for their portfolios.

The move towards standardising the South African listed model into the USA-style REITS will only enhance the attraction of our local listed property shares.

So Dubai is in town already and will dominate in property circles in the future.

Mike Flax

Madison Property Fund Managers

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I always try to imagine what property globalisation’s end game will be for South Africa. Could it mean a sameness to property environments around the world; V&A Waterfront with three or four dinky little copies of Dubai’s Palm developments between it and Robben Island; our Natal and Cape Coasts lined Costa da Sol-like with high rise apartments interspersed with golf estates; Russians sipping tea in their dachas and Japanese in their paper houses peppered around Boschendal; gargantuan Reits devouring our minnow-like listed funds? Our shopping centres and office buildings are there already, which I don’t think is great fun.

I was taught that property is local. You make your money by intimately knowing your particular neck of the real estate woods. You’re a winner when nothing happens without you knowing about it. Luckily I think that will still be the case.

Most of the global investment in SA property will come in quantum that limit it to the listed sector and only the very biggest direct deals. Yields will quickly converge with the rest of the world. For instance a R20 billion Growthpoint and a R40 billiion Madapexdefinehyp will trade at a global 4,9% forward yield and management will be bracingly transparent.

There is some danger that they could be devoured by the large local institutions that hold the majority in them or sell out to Westfield, the world’s largest Reit, and the like. But I suspect it will go the other way. Our top fund managers are world class operators and dealmakers and – exchange control regulations willing – will quickly spread around the world.

Local direct investors can take advantage of this by listing entities that will lure smaller, higher risk investors into their schemes. And the even smaller deals will be largely immune to outside expropriation.

Of course the lower yields will spread and projects will need more equity. But we’ll all have become so rich by then from our listed investments that it won’t matter much.

Ian Fife

Financial Mail