“International globalization and securitization of property were powerful trends in 2006 and are likely to continue in 2007,” says Les Weil, chairman of JHI Real Estate in his review of prospects for real estate in 2007. “If international investors apply international norms pertaining to yields then the current values in the listed property sector could still incorporate a premium in capital values over and above the effects of growth in earnings in 2007 which should average around 8%,” says Weil.

If this interest materializes then one can expect the 2% of foreign ownership in the listed property sector to start growing more rapidly. This does not, however, address the relative small size of the sector in international terms at R65 billion. In order to facilitate this interest we need larger and more liquid vehicles and therefore one can still expect to see a number of mergers and takeovers within the listed sector. “International investors have noted the purchase of the V&A Waterfront for R7 billion and are also likely to be looking at other substantial property prospects especially integrated precincts which incorporate the live, work and play elements.”

A further question, which needs to be addressed is when private equity action will commence in the listed property sector which could result in delistings? It was recently reported that in the US, Blackstone made a $19 billion (R140 billion) offer for Equity Office Properties Trust at a 8.5% premium on the value of this well traded REIT. There have been a number of these multi-billion dollar leveraged buyouts resulting from the high liquidity in the global financial system. Typically the objective of the purchasers is to hold the assets for 3 to 5 years and then sell on. The South African practice of built-in annual escalations in rental and low gearing ratios would make such a strategy even more attractive.

Set against real economic growth projections of 4-6% and the proposed R400 billion infrastructure development over the next 4 years, the effects of shortages in materials such as cement and lack of capacity in professional skills relating to the construction and property development sectors are of concern, according to Weil and indicate cost escalations over the next 3 to 4 years at well above the expected inflation rate. Developers will need to make certain that they are estimating correctly insofar as cost is concerned and also timeous completion of rezoning processes and services capacity. “In a world of caution, some counters in the listed sector are standing at a substantial premium to their net asset value and investors need to ensure they adopt a rational and analytic rather than an emotional approach, which takes into account realistic potential growth in earnings and escalation in the real value of the underlying property assets. It should not be forgotten that property investment is generally of a long-term nature and paying a too higher premium over real asset value, after taking into account liquidity and spread, could subject an investor to short-term adverse fluctuations in capital values”.

Rentals in all sectors are likely to continue their upward escalation in 2007 particularly in offices and industrial. In the UK it is interesting to note that out of an estimated value of £630 billion in commercial property, the investment is held equally by public, institutional investors and owner occupiers. “We have certainly seen an increase in the interest on the part of owner occupiers especially in industrial and warehousing property in 2006 and would expect this to continue into 2007”. Given the comments above relating to cost of development being more than double the inflation rate, Weil advises tenants with leases expiring over the next 2 years, to examine their options and secure their space going forward.

Weil concludes that “the sweet spot for real estate is likely to remain with us going forward until at least 2010”.

Issued by Rosemary Roberts of JHI Real Estate Ltd – 1 December 2006 For further information please contact Les Weil on (011) 441-0100 or 083 461 3777
Publisher: JHI Real Estate Limited
Source: JHI Real Estate Limited