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Now for the commercial boom

Posted On Wednesday, 08 September 2004 02:00 Published by
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If anyone does not have property in their investment portfolio, they are doing themselves an injustice'

Property Reporter

THE commercial property market, which includes office, retail and industrial properties, may well be on the verge of a boom that will cause prices to rocket and positively influence the performance of listed property stocks.

Commentators are upbeat about prospects for the South African economy, and expect the low inflation trend to continue for the next two to three years.

A low inflation environment implies a low interest rate scenario, which would spur economic growth and the expansion plans of businesses in SA. This will increase the demand for office, retail and industrial properties.

Colin Young, fund manager of Old Mutual's South African-listed property funds, says the low inflation rate of 4,2% in June this year is expected to near the 3% mark within two years. This would create a scenario similar to the 1960s, when the South African economy experienced simultaneous low inflation and good growth .

Young says one of the implications of a low inflation rate is that the yields of listed property funds drop in other words, their unit prices rise.

He says physical property prices would also rise in response to a low inflation environment. This applies especially to the retail property market because there is a shortage of small and medium-sized retail centres in the market.

An inflation rate of 3% in the next two years also implies low interest rates. This should result in gross domestic product growth, which is positive for the office property sector. "Businesses will be expanding because its cheaper to borrow," says Young.

In this scenario, the retail boom would also continue because a low interest rate and low inflation environment would continue to favour the consumer, particularly the emerging black middle income group, which would have more money to spend.

Young says that the industrial property market would follow retail property. "If retail grows, invariably industrial property will follow as it is an important cog in the manufacturing and distribution supply chain."

As far as the listed property sector is concerned, Young says the strong performance of the listed property sector last year, with a total return of 40%, was primarily due to interest rate cuts. However, in the past five weeks alone the listed property sector has achieved capital growth of 10%, and this is partly due to the better underlying property fundamentals.

Mariette Warner, fund manager of Stanlib Property Income Fund, agrees, saying it is "entirely possible that inflation will trend lower over the next few years". Warner says this has "very positive implications" for capital growth in listed property, which is also supported by strong property fundamentals in the commercial property market.

"In addition, listed property will become a more popular asset class. This has already been manifested by the very strong interest shown in property-based unit trusts by the retail investment market," she says .

Brian Kirchmann, CEO of commercial property association Sapoa, points out that the property market is cyclical. "We went through a lean period in the late 1990s and early 2000s. There is certainly a buoyancy across all the sectors of the property market," says Kirchmann. "The listed property sector has grown significantly over the last couple of years, and will grow exponentially over the next two to three years."

Kirchmann says even industrial property, which struggled most over the past five to seven years, is showing some "excitement".

"I am very upbeat (about property) and I think if anyone does not have property as part of their investment portfolio, they will be doing themselves an injustice."

As far as industrial property is concerned, Brian Azizollahoff, CE of listed property loan stock company Redefine Income Fund, says leasing trends in Gauteng shifted during the first six months of the year, from retail space, which proved most popular during the first quarter, to industrial and warehousing space.

"Currently, we are finding difficulty in keeping up with demand for industrial space in Gauteng," says Azizollahoff. The greatest demand for industrial space is in Kempton Park and Isando.

Azizollahoff believes the listed property sector is in the "midst of a boom" relative to the performance of the sector two years ago.

"The low interest rate environment, with consistently good results from the listed property sector, has made us an asset class that is finally being recognised by investment communities."

Azizollahoff says a number of listed property funds have achieved critical mass and this has led to acceptable levels of liquidity. He says increased demand for listed property stock has pushed up the prices of listed property stocks.

Sep 08 2004 07:38:08:000AM Nick Wilson Business Day 1st Edition

Publisher: Business Day
Source: Business Day
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