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Interest rates could push capital growth

Posted On Monday, 12 January 2004 02:00 Published by
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The boom conditions in the residential market also apply to commercial and industrial property
By Ian Fife
 
The boom conditions in the residential market also apply to commercial and industrial property. But fund managers and analysts say the sector will take off only next year.

Investors are still nursing a hangover in the form of square kilometres of empty space from the decentralised office development binge which began more than 10 years ago with the flight from city centres, as well as 10 years in the doldrums for SA industry that resulted in empty office space .

Provest MD Angelique de Rauville, Corpcapital's Marc Wainer and Spearhead chief Mike Flax expect the office market's oversupply to be mopped up. But Viruly Consulting's Francois Viruly says there are early signs that developers are starting new projects too quickly. "They could add to the oversupply, even this year," he says.

Flax and Wainer expect office rents to increase around 5% in line with inflation, giving flat real income. So does Colliers office broker Debbie Echstein. "But from next year, as occupancy rises above 90% in buildings in some areas, rents should increase by about 25%," says Flax. "This will push Sandton CBD prime office rents above R100/m²." Values will rise in sympathy with this.

Echstein does not believe that sort of rental will happen this year in Sandton, SA's most important CBD "unless the economy goes berserk". But she sees no sign of that. "Most companies are still keeping their staff to a minimum and fighting against expansion," says Echstein. "They usually wait to the last minute before taking more space. This gives them little time to arrange new offices to be developed for them and so they usually take existing offices."

De Rauville says demand for industrial space will increase faster than most observers are predicting. "I think the strong rand is not limiting industrial expansion as much as they expect," she adds.

Even if rents don't grow, investors can still look forward to reasonable capital growth this year. Wainer, Flax and De Rauville expect commercial property yields to fall (and therefore prices rise) by 10%-15% this year, mainly because of falling interest rates and rising confidence. Flax and Wainer say the yields on prime offices with blue-chip tenants on long leases are down to 10%. This means that prime yields will have dropped to between 9% and 8,5% by the end of the year, yields not seen for decades.

But Viruly is worried. "Some developers could start erecting new buildings in prime suburbs this year," he says. "They will add to the oversupply and rents will remain stagnant.

"Yields will still fall but prices will not rise as much as expected because they will reflect the continuing vacancies," he adds. "And structured finance deals at the low interest rates will effectively reduce rents as well."

Even if Viruly is right, it is unlikely to deter investors from piling into the market as high single digit yields and 10%-15% capital growth promise total returns of more than 20% in property this year. And that is about as good as it gets for investors today.

Financial Mail


Publisher: Financial Mail
Source: Financial Mail
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