According to First National Bank property strategist John Loos there will be a divide in 2008 between the performance of retail property on the one hand and industrial/office space on the other.
“With the great consumer boom past its best, and a significant growth in supply of new retail stock in recent years, a few years of slowing in retail property is expected, but a soft landing is nevertheless on the cards,” he says.
“The office and industrial sectors, on the other hand, are expected to resume their boom times. These two sectors may have experienced a mild speed bump in the form of a capitalisation rate increase in the second half of 2007 on the back of rising interest rates, but their low vacancy rates and strong rental inflation are expected to see to it that any lull is short-lived.”
Loos anticipates that the industrial property sector, which has been experiencing rental inflation in many areas in double-digit territory and often well over 20% over the last two years, will continue on this trajectory. He explains that when the hiking of interest rates tapers off, capitalisation rates will move downward, resulting in strong capital and rental growth.
“This will advantageously affect the office and industrial property sectors, which I predict will lead the way by a long shot in 2008.
“Effectively, 2008 is expected to be a two-horse race between these two property classes, leaving retail property and even a gradually turning residential market in their wake.”
Kevin Roman, group chief executive officer of Hermans & Roman Property Solutions, anticipates a rental income increase in the commercial property sector after decades of decline and he expects it to counter the latest interest rate hike, in which the Reserve Bank raised its repo rate by another 50 basis points.
The repo rate increase has affected the commercial property industry, with new developers in the industry hard-hit by land price increases and higher material and labour costs. In some cases materials have doubled in price over the past 12 months.
“Because the supply of new commercial developments is not meeting the current demand, the opportunity in the commercial property industry lies in tenancy,” says Roman.
“Prime rental space in the three commercial property sectors – office, industrial and retail – is in high demand and is increasing at a far greater pace than the effect of interest rate rises, which means the boom in the commercial property industry is set to continue.” In each of these sectors vacancy rates have fallen considerably and are at historically low levels, with investors enjoying yields of 9 to 10%.
“This bodes well for the future growth of commercial property despite the repo rate increase,” says Liezel Conradie, executive manager at Hermans & Roman.
“Those developers already on the market are perfectly poised to see huge returns on their investments, and owners of commercial property will enjoy a cash-flow injection from their assets.”
Hyprop CEO Pieter Prinsloo says that although the effect of the interest rate on the commercial property sector is still unquantified at this stage, large institutional players are currently very active in the commercial property sector, which makes it unlikely that interest rate increases will have a negative impact on commercial property values.
“In addition, international investors are expressing increasing interest in the South African property market in a bid to diversify their investment profile,” he says.
“And as a result of the attractive new property yields, continued strong property values should be supported.”
He adds that inflationary pressure is an inevitable consequence of high economic growth and something many developing countries are experiencing at the moment.
“In order to combat high inflation, economic growth will have to be sacrificed, which in turn can slow down new property developments. This will increase pressure on the already short supply of commercial property space available for letting,” he says.
Viruly predicts that South Africa will see very good performance from the office sector, with the industrial sector, “which is dependant on its performance on the availability of land and infrastructure”, not far behind.
He explains that industrial land prices will keep on rising as developers quest after land with infrastructure, which will increase rentals to make projects financially feasible. This is noteworthy as industrial land in certain areas is already twice as valuable as it was two years ago. – Kara Michaels
Source – Property 24