Surge in listed property prices set to continue

Posted On Monday, 13 June 2005 02:00 Published by eProp Commercial Property News
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The surge in listed property prices over the past few years looks likely to continue, according to the latest report from property economists Rode & Associates.

Erwin RodeThe report shows that investors’ thirst for retail, office and industrial property is continuing to drive capitalisation rates down. Capitalisation rates, the nonlisted property sector’s equivalent of equities’ forward earnings yields, decline when prices rise.

Garth Johnson, editor of the report, said buyers’ willingness to pay more for non-residential property was largely based on their "rosy prognosis" for property fundamentals, as well as their expectation of continued low inflation.

Johnson said listed property unit trust and bond yields had been at similar levels since the last quarter of last year, indicating that investors were expecting a "good showing" from nonresidential property.

Listed property tends to track long bonds because both are income-generating investments.

Johnson said that as property was regarded as a more risky investment than bonds this convergence reflected a general expectation that nonresidential property fundamentals would strengthen during the next year or more, leading to acceptable returns.

Rode & Associates CEO Erwin Rode said the only way listed property funds’ prices could grow from their "present lofty heights" would be for the income stream from their underlying property portfolios to continue growing.

"That seems highly likely. The income streams are growing about 5% an annum," Rode said.

If there was no further rerating of listed property funds their unit prices could go up by 5% a year.

Rode said there could still be more upside for investors in listed property, but that this time it would be based on property fundamentals rather than the rerating of listed stocks due to declining income yields.

In physical property, regional retail properties were fully priced, he said.

"The rerating has been performed in the case of regionals (shopping centres) and they are fully priced. From now on it will be growth in cash flows that will determine performances (of regional shopping centres)."

Rode said offices would probably be the next "success story" in the property market. "Rentals will soon take off, probably within six months. Vacancies are being taken up by a growing economy and new buildings will have to be erected at new building costs."

Catalyst Securities MD André Stadler said the "easy money" had been made on the rerating of listed property as an asset class. "The growth driver will be based more on fundamentals and growth in property income."

Growth in income will drive growth in unit prices.

"I believe there are companies in the (listed) sector that will rerate based on their ability to grow earnings stronger and on a more sustainable basis."

Stadler said the retail property sector had been strong for a long period on the back of consumer spending, but the office market was only just beginning to "turn the corner" in specific locations.

"In the office market there are still nodes suffering from significant vacancies but in certain nodes there is a shortage and large space users are unable to find accommodation," says Stadler.

Commercial property association Sapoa’s March office vacancy survey showed Century City, Claremont, Pinelands, Rondebosch and the V&A Waterfront in the Cape only have a total of 11000m² of vacant A-grade space.

"That’s a tiny amount of space. That represents 2,5% of the 500000m² available in all of those areas," Stadler said.

Last modified on Wednesday, 07 May 2014 10:40

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