CHALLENGES AND OPPORTUNITIES FOR 2003.

Posted On Friday, 29 November 2002 02:00 Published by
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Substantial opportunity for both investors and tenants exists in 2003.
 Substantial opportunity for both investors and tenants exists in 2003.

Speaking at JHI Real Estate's centenary function last week, executive chairman Les Weil, referred to the current commercial real estate market as challenging.

"The oversupply of office space, particularly in the North of Johannesburg, will still be with us for a couple of years. While this requires brokers to exercise innovative skills in assisting landlords with new tenant procurement, owners of properties and their representatives have also been creative in tenant retention. Tenants with leases terminating during 2002 and in some cases beyond, have benefited from these market conditions and achieved savings in their rental costs by up to 40%."

According to Weil, opportunities to buy at extremely good values have and will continue to present themselves to owner-occupiers and those who finance the purchases through the covenant of their own lease. Similarly, purchasers who are prepared to weather a period of vacancy, should in due course be able to procure tenants on terms favorable to them as investors.

As with all cycles, the market will turn and cognizance should be taken of considerable increases in building costs occurring as a result of increases in steel, aluminum, paint, etc., and particularly those products that are priced in US dollars.

Existing properties are therefore also increasing in value as far as replacement cost is concerned notwithstanding some abatement of the escalations if the Rand recovery is maintained. Having regard to the buoyancy in residential townhouse markets, many commercial developers have turned their attention to this area of activity. Until more space is taken up, office development will be restricted to occupiers whose requirements cannot be accommodated in existing buildings and to developers spotting niche situations.

Weil adds that up to the end of November last year, the international and South African economies were looking extremely rosy. However, things changed dramatically after the second week in December 2001. Although South Africa has performed relatively well in 2002 and is well placed for growth of around 3% in 2003, which is very good in international comparative terms, it is always possible for the situation to change rapidly owing to circumstances out of our control. Additional positive aspects for property relate to the effects of privatization programs and export buoyancy, the latter has beneficially impacted industrial premises. As long as these conditions prevail, there should be a progressive take-up of space during 2003 and rentals at the end of next year can be expected to be on the recovery track.

"Although there were a number of prospective property listings due in 2002, the change in market conditions at the beginning of the year and particularly escalations in interest rates and, therefore, yields resulted in only one new property listing. Activity in the listed sector was, however, reflected in the expansion of a number of PUTS and PLS's so that the market capitalization has grown to R15 billion. There was also considerable activity as a result of mergers and the expansion or formation of hybrid entities, comprising direct and listed properties and fund of funds. The listed sectors capitalization, however, remains small in relation to the total JSE and the total direct property investment market."

"In the event that market conditions continue to improve and interest rates decline in 2003, it is possible that some of the larger portfolios will come to the market with investors who were previously contemplating securitisation, revisiting their positions. This would be most welcome since the consolidations and mergers within the sector, whilst important in terms of creating larger and more viable vehicles, are reducing the variety of investments available," says Weil. Prices in the listed sector have tended upwards over the last fortnight discounting the likelihood of any further increases in interest rates and factoring in possible declines. Thus, assuming a relatively stable economic background, it can be expected that prices in the listed sector will increase further, notwithstanding that earnings may be flat or even decline, as investors factor into their decisions improving rental levels and the take up of space as the year progresses. Retailers have stocked up in expectation of a buoyant Christmas season.

Trading conditions in the first quarter of 2003 are likely to be much tougher as consumers experience the usual hangover of a shortage of cash. Thereafter, the outlook will depend on further tax concessions in the budget.

>From a development point of view, the smaller regionals have growth opportunities as do a limited number of new convenience centres particularly in expanding residential areas. It seems that some of the larger regionals are now reaching capacity and the question should be asked as to how many regional centres in excess of 120 000/m² the market can actually absorb.

Intensive research will be necessary in contemplating any further regional centre development to ensure that consumer need, as opposed to consumer re-distribution of spend, is the driving force.

"As always, management of retail space is an intensive business where effective promotion of centres can make a substantial difference. Careful planning is also required to manage the contrasting effect of liquidations of major groups such as RAG and major nationals growing their space throughdeveloping new brands within their networks," Weil concludes.


Publisher: JHI Real Estate Limited
Source: JHI Real Estate Limited

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