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Signs of commercial property boom ahead:FNB

Posted On Monday, 09 January 2006 02:00 Published by
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There are strong signs of a prolonged period of high fixed investment in commercial property in the coming years, says FNB property economist John Loos
By Lynn Bolin

There are strong signs indicating a prolonged period of high fixed investment in South African commercial property in the coming years, according to FNB property economist John Loos.

Real non-residential property fixed investment growth is forecast to accelerate to 9% in 2006 and grow positively through 2010 after recording an estimated 7% real growth in 2005, the longest such investment upswing in decades.

Writing in a research report released today, Loos said he was "really upbeat" about prospects for the commercial side of the local property market.

Although lagging behind the residential property market, this was to be expected given that households' decision-making and planning processes were far faster than their commercial counterparts, whose projects were much larger.

Driving the boom in commercial property was the acceleration in economic growth that had occurred, with significant spare capacity having been taken up in the commercial property space, Loos noted. In the case of office property, vacancy rates had been declining since 2003.

Industrial property had had to contend with the highest manufacturing capacity utilisation in decades, while retail property had benefited from the well-documented consumer boom.

"Certainly the fixed investment environment has been improving for some time," wrote Loos. "What is still perhaps necessary to unleash stronger fixed investment in the sector, however, is a greater degree of confidence by investors in the possibility that stronger economic growth is here to stay in the long-term, and that the structural adjustments that have taken inflation lower, resulting in major interest rate reductions, are also of a more permanent nature."

This lack of longer-term business confidence could be constraining the pace of the upswing in non-residential building fixed investment, but this should reduce the probability of a massive oversupply of commercial property - which could have sparked a boom and bust cycle, he commented.

The real value of buildings completed had been rising over the past three years, but had yet to be spectacular, with levels still below the real peaks of the previous four cycles. However, the real value of building plans passed indicated that the pace of growth had already accelerated-from 37% growth in 2004 to nearly 70% in 2005.

According to Loos, all categories of commercial property - retail, office, industrial and warehouse - had posted significant increases in building plans passed on a square-metre basis.

Although some might argue that the expected slowdown in overall economic growth, including retail sales growth and manufacturing output growth, might indicate a halt to building expansion, this would ignore the leads and lags in the building process, the economist pointed out. Also, real GDP growth was still forecast to grow at 4% or more in 2006, which should limit any downturn in manufacturing while sustaining sharply higher levels of consumer spending, he believed.

"Spare capacity in building space may, therefore, not improve in the near-term. During 2005, manufacturing capacity utilisation reached its highest rate in over three decades, according to the South African Reserve Bank, while office vacancies have been declining steadily since 2003, according to SAPOA.

"Therefore, after recording an estimated 7% real growth in 2005, real non- residential property fixed investment growth is forecast to pick up to 9% in 2006 and grow positively al the way through to 2010. Is this just wishful thinking to expect the longest non-residential fixed investment upswing in decades? No," he stated.

"If you're going through the longest business cycle upswing on record, and have been through the most impressive residential property and consumer growth booms in decades, a next logical step is to expect fixed investment to blossom for a prolonged period of time, especially given the prospect of the solid GDP growth continuing for some years and interest rates remaining favourable.

"Commercial property investors may take it a bit slower, perhaps, than their residential counterparts, with this boom being more like a marathon compared with the 'sprint' of residential property, but the upswing may continue for a good number of years as a result," concluded Loos.

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