Bobby Malabie

The outlook for the SA commercial property sector — retail, office and industrial — is relatively encouraging in 2011, as the country emerges from a global economic downturn.

The residential development market remains under pressure due to oversupply. However, a tapering off of new residential development activity and more stringent home loan lending criteria in respect of first-time home buyers, will ultimately result in a greater degree of equilibrium between supply and demand in this sector.

Faster economic growth, coupled with positive GDP forecasts, indicate that recovery trends in household sector finances should emerge.

However, significant oil price increases as a consequence of the uncertainty in the Middle East could cause further inflationary pressures. These may serve to curtail this recovery, particularly since household debt to disposable income remains disturbingly high.

Though demand for office space is node-specific, the expectation is that vacancies in many areas will be taken up in 2011. As such, they will be reduced to below 10% in the major decentralised urban nodes — the first time this will have occurred since 2008.

Similar to the other property sectors, offices have escaped the economic downturn to some extent because of a substantial drop in nonresidential building activity in the past three years. For example, office buildings completed in 2010 were down 40% on those built in 2009 in terms of square metres. This falloff in building activity has meant that the office sector was not burdened with an oversupply of stock when the recession took hold.

Hardest hit by the economic downturn has been the manufacturing sector, with exports having felt the adverse effects of a strong rand and lower global demand.

Though the recession has had a significant effect on the industrial property sector, the pain has been absorbed — to some extent — by government infrastructure spend in the period leading up to the 2010 soccer World Cup. Also, general-purpose industrial properties located on good transport nodes continue to perform well.

An area of concern is the potential negative effect that electricity tariff increases could have on the commercial property market. Though tenants have so far managed to absorb rising power costs into their operating costs, they may not be able to accommodate the full extent of these increases into the future.

In the yield-sensitive environment in which we currently find ourselves, landlords and tenants may be forced to negotiate electricity cost-sharing arrangements, failing which rental growth opportunities may be significantly inhibited.

In addition to these factors, performance of the industry will also be affected by the following variables:

Building costs and margins, which will remain under pressure following the 2010 World Cup construction boom, and force contractors to be more competitive in terms of tenders.

Access to funding. Banks have become more prudent and selective about where and to whom they lend, and preference is given to property developers and investors with strong and sustainable cash flows.

The effect of the new Gauteng toll road system, even though the jury is still out on it, remains to be seen. But it is possible that it may result in people travelling less and a greater proliferation of work-from-home businesses springing up. This possibility, as well as the cost that these tolls will have on monthly household expenditure, will need to be taken into account by developers as they plan new developments.

The SA property industry has outperformed the 20 other countries measured by the Investment Property Databank (IPD) over the past five years. These countries include Australia, Canada, Germany, Switzerland and the US.

The number of challenges facing the property sector notwithstanding, the industry is well positioned for the year ahead. Projected real economic growth of about 4% in 2011 and a relatively stable interest rate environment should prove to be catalysts for continued growth. However, all roleplayers, including developers, investors and financiers, should bear in mind that property remains a long-term investment class rather than a quick-win game.

Absa Business Bank CE

Source: Financial Mail