The performance gap between commercial and residential property has widened significantly, latest data about the various sectors of South Africa’s property market shows.
While investors were still spinning profits of close to 30% last year on factories, shopping centres and offices, returns on housing have slumped to 10-year lows.
Housing data released by Standard Bank last week shows that house prices last month dropped into negative growth territory for the first time since July 2000. Median house prices plummeted 5,2% in March (year-on-year), the biggest drop in a decade. That means a house that cost R1m in March 2007 is now worth R948k.
Whether you use a median or an average house price index, the fact remains that commercial property is now a far more profitable place to be than housing.
FNB’s recently introduced residential rental index puts the national average net income yield for SA houses at 6,1% (annual rental income minus operating costs as a percentage of a property’s value) in first quarter 2008. Add that to Standard Bank’s capital growth of 5,2% in March and current total returns on residential property using that particular calculation comes to less than 1%.
That’s in stark contrast to the Sapoa/IPD SA property index released recently, which showed that directly held commercial property delivered a 27,7%/year total return in 2007 – 17,7% capital and 10% net income. In fact, commercial property returns accelerated last year, up from 26,7% in 2006. The index measures the annual performance of SA institutional and listed property portfolios valued at R134bn.
In terms of performance of the different sub-sectors of the SA commercial property market, industrials came tops for the third year running, with total returns of 33,6% (1006: 31,1%). It seems the long-awaited turnaround in the office sector has finally started to kick in, with those delivering total returns of 30,8% last year (24,5%).
Although retail has long been the SA commercial property market’s biggest money-spinner, returns on shopping centres slowed to 26% last year, down from 27,4% in 2006.
Admittedly, the Sapoa/IPD figures are only up to end-2007 while housing figures are more recent. However, analysts don’t expect commercial property returns to slow significantly this year.
Stanlib property analyst Evan Jankelowitz says although returns on commercial property could soften somewhat in 2008 – particularly that of retail property – commercial landlords are still reporting good rental growth on lease renewals. “The key variable going forward is how demand holds up.” – Joan Muller, Finweek