Another giant property bubble waiting to burst
LONDON, CAPE TOWN: This week, in our wrap of property news elsewhere in the media: The London property market - long-favoured by South African offshore investors - looks perky, but there's a timebomb ticking in its midst. And, back home in South Africa: the luxury property development company boss who has lost his sense of humour.
Tick tock. Bank managers in developed countries aren't sleeping well these days. Just as the world starts to recover from the sub-prime mortgage debt fiasco and the residential house price crashes that have rippled across the world, there's a new property bubble that's getting bigger and bigger. And there's a needle not far from its sides.
There have been rumblings for some time that commercial property debt is proving troublesome to US bank managers and now we hear that it's becoming more of a worry as the days go by for their counterparts on the other side of the Atlantic. The Observer newspaper's business journalists are of the opinion that the boom in prime London real estate and the strong recovery in the shares of big listed companies like British Land, Hammerson and Land Securities give a misleading picture of the real estate market as a whole.
Banks are desperate to prop up property, but they're sitting on another timebomb: huge amounts of hidden distress. "This is being papered over by the banks because they simply cannot crystallise the enormous unrecognised potential property losses sitting on their books without putting themselves right back on the critical list," says the newspaper.
It says "one very senior industry figure" estimates that around three-quarters of property companies are likely to be in breach of their banking covenants and could not rectify the financial situation if called upon to do so. Other bankers agree, and it seems the new slogan among British bankers is "extend and pretend". They want to allow companies to keep going, so they can service their debt, but they are pretending everything will be fine.
This new property high is being largely stoked, it says, by overseas buyers taking advantage of the weak pound and financing transactions with equity capital, not debt. There is also a shortage of supply, with an estimated £7bn of capital chasing about half-a-billion's worth of desirable property for sale.
Particularly worrisome, it tells readers, are properties at the lower tiers of the market. "A dowdy retail development in a secondary location, say, faces the prospect of pressurised consumers who fear rising unemployment, the end of quantitative easing and an eventual rise in interest rates. Empty units are lowering developers' income streams and making debt harder to service, and there is precious little funding available for redevelopment of these sites."
The Observer emphasises that it is "hard to over-estimate the seriousness of this for the big banks, in particular the state-controlled ones". The newspaper's business journalists say that inevitably some companies in difficulty now will "self-heal", but many more will not. "Property will remain a blight on the banks for years to come."
"It would not take very much to puncture the prime property bubble - a strengthening of the pound, or a further downturn in the economy, hitting tenants and their ability to pay for space could do it," cautions the newspaper.
Tabloid Tuesday's got a side-bet on a fluctuation in the value of the pound being responsible for that ultimate pin prick. As we know down here in these wild parts of Africa all too well, there's lots of funny business that goes on in currency trading corridors. One minute your Cape Town coffee costs 15 times the price of a mug in London, the next it's closer to par. Twenty years ago you could buy two cups of South African coffee for the equivalent of one in Zimbabwe. These days a Zimbabwean note's worth more as a segment of loo paper.
Holiday-ready Brits have been complaining that their pound won't stretch very far in Europe this festive season. The average consumer will be willing the national currency to change soon - an improvement that could easily come, if you believe The Observer, at a hefty economic price.
From pricks to plots. Luxury property developer IFA Hotels & Resorts is in the news again as speculation mounts of its growing financial distress. It owes contractor Liviero Building at least R18m and an architect tells Realestateweb that work has ground to a halt at the R350m Zimbali Fairmont Hotel, KwaZulu-Natal, site, so no doubt other organisations are owed big money too.
IFA (JSE:IFN) is a publicly listed company but its South African head, Wessel Witthuhn, doesn't seem to understand the term "public". When your shares are listed on a stock exchange for anyone to buy and sell, there's a certain amount of transparency expected when it comes to your financial situation. This is one of the reasons service providers, like building contractors and banks, like to do business with a listed company.
Not so long ago Witthuhn was finding matters so amusing that he literally burst out laughing when Realestateweb asked him for the IFA version of events around the Liveiro building contract.
These days even Witthuhn, IFA Hotels & Resorts Africa and Indian Ocean president, appears to be failing to see the lighter side of matters, and he has gone into hiding. He will not answer pertinent questions.
Maybe he'll feel better after the Alliance Group has auctioned off Boschendal wine estate for IFA, helping to free up some much-needed cash to those it owes money. The looming sale, meanwhile, suggests that Witthuhn's bankers are not in the mood to "extend and pretend" as is the British way. IFA reportedly owes R200m to Nedbank.
Builder's plot. South African builders seem to be relatively dignified about their debt woes. Liviero, for example, is waiting for the law to run its course. The Times newspaper runs a recent report on a North Yorkshire, England, builder who kidnapped a customer's wife and two-year-old daughter and held them for nearly 24 hours in a dispute over a bill worth the equivalent of about R70 000. The builder and his son, Tony and Matthew Scaife, admitted conspiracy to kidnap at the Bradford Crown Court, and will be sentenced later.
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Comments
Something about a put option they could not perform? What news? Another problem here?
by Shareholder on November 24 2009, 12:15
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Since most property developers are colossal pricks, few people will feel sorry when the C*** hits the fan. Unfortunately Nedbank clients are going to be the ones to pay should IFA go tits up.
by Mrs Ples on November 24 2009, 13:42
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...more business for Rael Levitt. He he
by Moneygirl on November 24 2009, 14:24
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Good article. JSE - time to do your job and step in and DEMAND transparency from IFA. This is a bad reflection on the public safeguards that are seemingly provided by the JSE to protect shareholders and stakeholders interests.
by Public Officer on November 24 2009, 14:40
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All the pretentious arrogant Zimbali @shole%'s deserve evrything coming their way.Imagine spending R350 mil on a friggin hotel.
by Krazy on November 24 2009, 16:10
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IFA can refuse to answer questions, but then they must be suspended from the Stock Exchange. Simple. If after 3 months they still refuse, then perhaps their should be a Class Action suit brought against them by their shareholders. Directors have certain . .more
by I F A on November 25 2009, 09:06
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