By Thabang Mokopanele

SA is not likely to see a hive of activity in major speculative developments after some listed property companies learnt the hard way in 2008 and 2009 leading to an oversupply of space in the industrial, office and retail sectors from speculative activity.

Some listed companies have stated in their interim and year-end results that they will not do speculative developments unless the proposed projects are substantially pre-let.

Meago portfolio manager Jay Padayatchi says funding for speculative residential development will be hard to come by as many nodes are oversupplied with residential stock that has not yet been absorbed in the existing economic climate, even with the big cuts in interest rates.

"Retail development is rarely speculative in the true sense, as it is often retailer driven, and hence will require commitment from the retailer to occupy the space, hence funding in turn will be contingent on these leases coming to fruition," Mr Padayatchi says.

He says the performance of many of the retailers over the past festive season will also influence attitudes as to the extent and location of space they will be demanding this year.

But Investec Asset Management portfolio manager Vuyani Bekwa says large private developers are likely to lead speculative developments, but not with bank funding.

"These developers are expected to use their balance sheets to fund new speculative developments.

Developers with strong balance sheets are not under pressure with letting of completed space and are in a position to hold the property until a suitable tenant or purchaser comes along," Mr Bekwa says.

However, Stanlib’s head of property funds, Keillen Ndlovu, says the office market has been the hardest hit from speculative developments.

"Given this, we do not see any major speculative developments in the office space. This market is still feeling the pain of oversupply," Mr Ndlovu says.

However, he says there are office developments around the Gautrain stations, but some will be owner-occupied. "The problem is that they (the owner-occupiers) will be vacating office space elsewhere."

Mr Ndlovu says the retail market is "undoubtedly" saturated in most metropolitan areas.

"It is unlikely that we will see major retail centres coming up this year and development activity in the commercial property sector will remain subdued as developers and financiers remain nervous of the possibility of oversupplying the market," he says.

Building activity figures released last month show that while the real value of building plans passed in the residential sector increased 1,5% in the first 11 months of last year (compared to the same period in 2009), plans passed in the commercial property sector declined by a substantial 38,5%.

Prof Francois Viruly, of the School of Construction Economics and Management at the University of Cape Town, says while this illustrates the weakness of development activity, the expected decline in development activity should assist in reducing vacancy rates.

Prof Viruly says in addition it should place downward pressure on building cost increases.

He says the rise in building costs will remain close to the inflation rate this year.

"Two issues will have an important effect on the level of development activity this year. First, developers and financiers need to be convinced global and domestic financial uncertainties have been brought under control," Prof Viruly says.

He says the banking sector will need to be convinced that market fundamentals justify an increase in supply.

Prof Viruly says as economic growth will largely be driven by consumption expenditure, it is likely that investors and developers will pay particular attention to the retail sector. "This will largely take the form of renovations and the expansion of existing properties."

Although the manufacturing sector is restocking, exporters will continue to feel the brunt of the strengthening rand and prospects for the sector will remain subdued.

Source: Business Day