SA's property sector is bracing for a bumpy ride in the year ahead.

Posted On Monday, 06 January 2003 02:00 Published by eProp Commercial Property News
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Fund managers do not expect earnings growth; period of consolidation.

Francois VirulyThis year is likely to be another harsh period for property investors.

Several listed property fund managers have taken a dim view of the year ahead despite the expected positive changes in SA's key macroeconomic fundamentals, including improved economic growth.

Property economist Francois Viruly says the expected decline in inflation and interest rates and the strengthening of long-bond yields would benefit property values.

Viruly sees enormous opportunities in industrial property as a result of improved manufacturing. He says the level of commercial property development is dropping and the commercial sector is moving closer to equilibrium.

'Although equilibrium may not be hit in the next 12 months, it will be a period of consolidation,' he says.

While many listed property fund managers agree with this positive macroeconomic view, they expect not so bright earnings prospects.

Having reported flat earnings last year, many listed property funds have not budgeted for growth in this year's distributions. Some expect to see a steady return to growth in earnings by 2004 and 2005.

In the statement of results for the year ended October, Paramount Property Fund MD Rodney Squire-Howe gives a comprehensive account of the commercial property trading environment.

Squire-Howe says while business confidence is higher and the outlook for increased growth is better, it will take some time for this to filter through to the property market and impact positively through increased rentals and decreased vacancies.

'General consensus in the industry is that property income growth will be all but flat next (this) year,' says Squire-Howe.

Heavyweights of the sector, Redefine and Grayprop, expect flat earnings in the year ahead.

The cries of many of listed property fund managers have a common factor high interest rates. The rates went up four times last year and claimed substantial portions of property income through increased interest charges. These interest rates pressures came on already depressed income as a result of oversupply, particularly in the office property sector.

In its latest annual report, Redefine's CEO Peter Penhall says, while the group has a strong platform to continue generating improved distributions in the long term, medium-term prospects have been tempered by the high level of interest rates.

Redefine delivered a 5,7% increase in distributions in the year ended August. Property unit trust Grayprop produced a flat distribution of 30,7c a unit in the six months ended September

Grayprop says the budgeted distributable income for this year is substantially the same as last year's.

Fund managers suggest that key variables that drive property income directly are not likely to be substantially moved this year.

These include building vacancies which shot up as a result of over supply in the past two years.

High vacancies especially in the office sector are expected to persist for the better part of this year.

Until these vacancies are worked out of the market, rental rates will remain depressed.

All indications are that the property market will see material changes after this year.

Last modified on Wednesday, 23 April 2014 12:31

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