The bubble: myth or fact?

Posted On Tuesday, 01 March 2005 02:00 Published by
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Pervasive view of a property bubble that is about to burst is a misconceived one

Property analyst at Andisa Securities Len van Niekerk tells Engineering News that the per-vasive view of a property bubble that is about to burst is a misconceived one.

Van Niekerk takes an overall view of the property situation and points out that different aspects are at different phases in the growth cycle.

He divides property into four distinct markets: industrial, retail, commercial and residential.

Van Niekerk explains that these categories are not mutually exclusive, as a dynamic exists between them, such as residential areas being built around retail areas.

"It is more a case of there being ‘bubblets’ in some areas, as some markets are probably overheated." As an example, he cites the flat market in and around Sandton City, north of Johannesburg.

"Location is always important, but one should always keep an eye on the value and not pay ludicrous prices," he says.

There is a danger that prices could soften if owners in the buy-to-let market are overborrowed and unable to achieve an adequate return and then decide to sell, he states.

"However, a key difference between South Africa and a market such as London that will prevent a serious blow-out is the rapid increase in the supply of residential space in this country to meet growing demand.

"Bubbles develop in markets where significant imbalances between supply and demand arise." In the office-rental sector, he says, the signs are that development is picking up, although not at the same frantic pace as from 1999 to 2001.

"The market is more cautious now, and banks are reluctant to financespeculative development unless a substantial proportion is prelet on long-term leases," he says, referring to the crash after the earlier boom period.

Another factor that must be con-sidered when developing office space is the age-old one of location.

"For example, there are decentralised areas in Cape Town, such as Rondebosch and Claremont, which are seeing offices being converted into flats," says Van Niekerk.

The location, close to a university, means that vacant offices are being used more efficiently.

This, he points out, would not happen in places such as Sandton and Rivonia.

Cape Town and Durban have space constraints that Gauteng does not, due to their proximity to the sea.

Van Niekerk makes the point that residential trends have a bearing on office locations.

"Offices tend to follow the bosses," he says, referring to the phenomenon of office space opening up in previously residential areas.

The newer residential developments are being built in areas that contain the only open land available – other de-velopments in already built-up areas are a case of recycling.

This, he says, is when more-efficient use of land is made and a large older house is replaced with several townhouse units.

Particularly apparent in suburbs like Bryanston and Waverley, this phenome-non, which is growing in popularity, is affected by traffic congestion and travel time in the northern suburbs.

A recent surge in retail property development is leading to concerns that it is oversupplied, especially in metropolitan areas.

Van Niekerk points out that the burden of failed ventures does not affect developers and often hinges on the landlord’s ability to attract a key anchor tenant.

What may affect the growth of retail and commercial feasibility in the short to medium term is a residential slowdown.

"Residential prices should only rise between 10% and 15% this year – this seems to be the general consensus." But a continued increase at rates of 30% each year is not sustainable, he says, warning that the rate of price increases must slow down.

Assisting housing prices in maintaining some buoyancy is the relatively stable interest-rate environment.

"A sharp rise in interest rates will not happen in the current macroeconomic climate of low inflation and the stable rand.

"Rates could remain little changed, varying by about 1% over the next two year," he adds.

Sharing his view on the stability of interest rates over the medium to long term is Marc Schneider.

As head of research at online property research and consulting firme-Prop, he keeps a keen watch on the property market.

He tells Engineering News that two aspects are largely responsible for the recent surge in property prices.

One of these is South Africa’s fiscal policy, which is receiving favourable mention from developed countries.

The other, hand in hand with the policy, is the positive effect of the domestic economy.

Currently, all the fundamentals for a property boom are still in place: a strong rand, low inflation and lowinterest rates. This leads to consumer confidence, especially in the residential sector, which Schneider says will spill over to the nonresidential sector.

Risks involved in the acceleration of the market would be if consumer confidence followed the US and UK markets.

"The US and UK have moved into an interest-rate upward trend; locally there are concerns over the local residential market having peaked," says Schneider, He adds that the key to picking up on any adverse movement would be if one of the three fundamentals shiftedsuddenly, such as a drastic interest rate increase.

"Interest rates are key to an investment because they affect the cost of capital and, in turn, the consumer market." He adds that no one is expecting an interest rate hike, based on the Reserve Bank Monetary Policy Committee’s target inflation range of between 3% and 6% a year.

Schneider questions whether the property market deserves a lower interest rate than the one it is currently benefiting from.

He refers to the spike in rates in 1998, the Asian crises of the late 1990s and the broad-based oversupply, leading to a crash in the market.

"The effect of this has carried through until recently," he says.

Currently, however, the office sector is optimistic, as net takeup has broadly increased, vacancies are down and base rentals have improved.

Now, he says, is a good time to ensure a favourable long-term lease.

Publisher: Engineering News
Source: Engineering News

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