While the slow-down in building activity in the residential sector has been expected, recent statistics for non-residential property have surprisingly shown that this sector is also now beginning to weaken.
According to property economists Rode & Associates, there has in particular been a slow-down in building plans being passed for the development of office and industrial property.
Says Erwin Rode: ‘At first glance, this deceleration would seem to be an anomaly when one considers how strong the fundamentals for non-residential property are – what with low vacancies and rising rentals, clearly the demand is still there.’
The reason, believes Rode, lies in the predicament in which listed funds currently find themselves – an aftermath of the economic and political uncertainty that has influenced investors since January.
Explains Rode: ‘Twenty years ago, the major players in the non-residential market were the pension and life-office institutions, who were largely unaffected by fluctuations in the interest rate because they were not dependent on any debt finance. Hence, they could afford to take a longer-term view of three to five years.’
However, notes Rode, two things have happened since the second half of the 1990s: ‘Firstly, listed funds have taken over from the institutions – and these funds are typically dependent on loan capital, which has become very expensive.
‘Secondly, the strong market rating (low income yields) of these funds, relative to the cost of debt, is making the acquisition of new properties difficult for these listed funds, unless they are prepared to dilute their earnings, which property analysts generally frown upon.’
On top of this, Rode continues, has been the rise of the private developer: ‘Like listed funds, they are interest-rate sensitive. Thus the entire market has become more sensitive to changes in interest rates, and so proposed new office developments are now lagging behind in spite of the strong fundamentals.’
The question, then, is whether this is the time for institutions to re-establish their territory in the non-residential market place. Comments Rode: ‘This certainly puts those who are not dependent on loan capital into a stronger position to accumulate stock and take on new developments with a longer-term view.
In fact, notes Rode, a number of institutions are already back on track – among them Old Mutual, as well as companies such as Pareto Ltd. The latter, owned jointly by Eskom Pension and Provident Fund (EPPF) and the Public Investment Corporation (PIC) recently saw the addition of Mimosa Mall in Bloemfontein to its portfolio, giving Pareto Ltd (an unlisted property-loan-stock company) a significant stake in seven major shopping centres across the country.