Moody’s: Weak macroeconomic conditions to have limited effect on securitised transactions in SA

Moody’s Investors Service today published a structured finance research report that looks at the performance of South African commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS).

“Despite subdued economic activity, with weak consumer demand, low business investment and political uncertainty, the effects on the underlying commercial/residential real estate markets and associated securitised transactions is limited,” says Tobias Venzke, Moody’s Assistant Vice President – Analyst.

“Capitalisation rates show moderate softening and the flat residential property market will have a limited effect on deal performance.”

The report finds that:

• The deterioration in macroeconomic conditions adversely affects local real estate markets, which in turn affects as a main driver both rental and capital values of commercial real estate. Meanwhile, weak business confidence and uncertainties related to land expropriation remain key challenges for a robust expansion of real estate.
• The economic downturn will have a limited effect on CMBS as the softening in capitalisation rates for commercial real estate is only moderate. While the political situation of the country with changes in its political leadership has been volatile and the country’s economic performance has been weak, the impact on capitalisation rates and valuations of commercial real estate has been limited.
• However, the capitalisation rates for commercial real estate have not followed the trend of long-term government bond yields more closely and the current spread between the capitalisation rate and the bond yield implies a historically low level of risk premium for commercial real estate investments over the quasi risk-free rate. The current pricing of commercial real estate risk will therefore be exposed to downside risk if rental and capital value growth is lacking.
• Despite this downside risk, Precinct 2, a CMBS transaction rated by Moody’s, seems adequately positioned to withstand a further deterioration in commercial real estate fundamentals. The current leverage and coverage ratios for Precinct 2 indicate sufficient headroom.
• A flat residential property market will have a limited effect on RMBS transactions.The market was subdued in recent years, with nominal housing prices appreciating annually by 4%, on a national average, in line with national inflation, with flat growth in real terms. There is still some house price volatility across regions, reflecting different local trends, including in-country migration.