After almost six years of uninterrupted growth in SA's residential property market, the past two years have seen stronger growth rates in the commercial segment.
Office, retail and industrial property returns have performed well over the past two years and the Absa Commercial Property Finance (CPF) divisions dealing with clients operating in those markets are reflecting the growth rates.
The return on equity for the Absa CPF divisions dealing with medium- and large-sized clients is about 25% at present.
"The performance of the commercial property market is closely linked to economic growth rates, which have been strong over the past few years," says Herman Poelmann, who runs the division dealing with large clients.
The average loan size to his customers is about R8m, though individual transactions can go as high as R170m. The average loan awarded by Absa to its 9 500-odd medium-sized clients is about R2m, says division head Tienie Strydom.
In Absa CPF's segmentation of its client base by size and sector, Strydom and Poelmann run the divisions collectively. As opposed to the key accounts and listed sectors, their divisions are characterised by a set of product suites that are offered to their customers, as opposed to the account-based consultants who are used by the other divisions.
The focus is also different. "Whereas the customers in the listed and key accounts divisions have a specific property focus, our clients are more diversified and commercial property is only one of their areas of investment," says Poelmann.
The typical client, he says, would be a company that wants to either acquire property investments directly from the market or develop a retail centre or office development.
The "average" client in Strydom's sector "is looking to invest in a neighbourhood shopping centre, an office or a small industrial property. We also find that we lend to a lot of companies which want to buy or build an office after they have been renting premises for some time".
Both managers say that their lending to black clients is still limited, but this will correct itself in the near future.
The medium and large client divisions have a strong alignment with Absa Corporate & Business Bank and there is strong crossreferral between the operations. Poelmann says about half of his business is referred from the Business Bank; for Strydom's division the referral rate is as high as 70%.
Despite the fact that the product offering is the same to all clients, Strydom says clients enjoy a strong relationship with Absa CPF. "We don't just understand the risk of lending but also the risks inherent in the property market," he says.
The relationship with the broader Absa group is one that both executives highlight as one of the business advantages Absa CPF has over its competitors. "Our national footprint gives us a significant edge and we can more easily serve clients in more remote locations. If Absa CPF doesn't have a presence, then the Business Bank does," says Poelmann.
Many of the risks facing the two divisions are similar to those experienced by the whole of CPF: escalating building and land costs and shortages of resources.
But there are threats that are specific to their sectors, mostly from increased competition in their sectors.
"Margins are definitely coming under pressure as some of our competitors are making a concerted push for higher market share by cutting fees and margin costs," says Poelmann, adding that many customers are multibanked to begin with and can thus compare costs directly.
"We believe that our cost of funding reflects the business risks taken and clearly varies between clients and projects. Certainly for a development loan we are looking for a slightly higher fee component in our offering in return for taking a share of the risk and becoming involved as a partner in the project," Poelmann says.
Other ways of providing value are by working more closely with clients and gearing up existing investments, thus providing equity that can be used in growing a client's overall investment base. Clients' return on equity can also be enhanced in this manner.
Commenting on recent market trends, Strydom and Poelmann say that they have noticed a push towards more industrial developments among their client base.
And though there is still growth left in both the retail and office markets, the move towards industrial property makes sense - given the expected boom in infrastructure and fixed investment spending over the next few years.
