July 5, 2004

By Dirk De Vynck

Cape Town - Directly held non-residential property is being rerated in a big way, even in the almost forgotten central business districts (CBDs), the latest Rode's property market report shows.

The report said that capitalisation rates - the non-listed property sector's equivalent of the forward earnings yield of shares - maintained their declining trend of the last few quarters.

Capitalisation rates decline when market values improve.

Erwin Rode, the chief executive of property economist and valuer firm Rode & Associates, said that even the capitalisation rates of CBD offices had been coming down sharply, implying that investors' general sentiment towards offices in the city centres was improving.

Rode said the improvement in capitalisation rates could be attributed to a combination of reasons.

For one, directly held non-residential property was perceived to be the only asset class that was not fully priced at present, which explained the ever-growing demand from listed property funds and property syndicators.

Investors were also finally realising that inflation would most probably settle at a lower rate of 5 percent to 6 percent.

Lastly, capitalisation rates might be profiting from the promising growth in the demand for non-residential property space, Rode said.

He expected capitalisation rates to continue decreasing as investors caught on to the undervalued status of directly held non-residential property.

Property economist Francois Viruly also thinks there is further room for capitalisation rates to come down.

However, he expected the decline in office capitalisation rates to be more subdued because of the oversupply of office space.

The Rode's report shows that, collectively, shopping centres' capitalisation rates have shown the best improvement among all the directly held non-residential properties.

This comes as no surprise, as the retail property sector has been the best performer over the last few years and, naturally, will create the most interest among investors.

A further boost may have come from the strong performance in retail sales, which reflects positively on rentals.

The report said the decline in the capitalisation rates for CBD offices had been apparent since mid-2003, with the Durban CBD showing the biggest gains.

"Except for the postulated reasons for the turnaround in capitalisation rates already mentioned, the improvement in the CBD office capitalisation rates can, in part, also be ascribed to the hype surrounding the conversion of old office buildings into residential units and the generally increased optimism this has created for the CBDs," the report said.

"This would not have been possible without getting crime and grime under control."