Although  widely expected, the 50 basis point rise in the repo rate in June may  see a short-term dip in the prospects for commercial property. As John Loos,  property  strategist  at  FNB  Property  Finance,  puts  it: “a mild speed-bump  for a property sector with very strong fundamentals, and in the case  of industrial and office space may have been the cause of a premature short-term trend change towards mild weakening.”

Loos points out that with returns from the total commercial property sector (retail, office and industrial) starting to dip in 2006 with a 26.7% return after  the  30.1% recorded in 2005, most of the cooling probably took place in the second half of the year.

“If  one  examines  Rode’s  quarterly  capitalisation  rates, they showed a reversal  of their declining trend in the third and fourth quarter of 2006,
in  other  words  from  just after the first in the series of interest rate
hikes,” notes Loos.

Craig  Hallowes,  spokesperson for the Association of Property Unit Trusts, comments that “Retail property is likely to see the largest impact from the interest  rate  hike  as we would expect growth in retail sales to feel the effect.  However,  this was only a 50 basis point rate increase, so I don’t foresee  a dramatic change. This has also coincided with the implementation of  the National Credit Act, and we need to wait and see what the effect of that will be on retail sales.”

The  impact  on  industrial  property  is  likely  to  be relatively muted.
“Industrial  and  warehouse  space currently experiences low vacancy rates, and  in  2006  had  the  highest returns, at 31.1%, of the major commercial property  categories.  While  its longer term fundamentals remain solid, it would  appear that this property sector, too, could experience further mild deterioration  (though  still  remaining high) in total returns in the near term,” state Loos.

As far as office space is concerned, Hallowes has previously noted that the office  sector  is more likely to outperform industrial and retail property this  year.  “Office  space,  being services related, is the least interest rate  sensitive of the three commercial property sectors,” he notes, “and I expect  that  this  sector  will see the least impact from an interest rate hike.”

Loos  concurs,  adding that: “The sector’s fundamentals remain strong, with little  reason  to expect a reversal to the declining vacancy rate trend as yet.”

If anything, a pullback in Property Unit Trust (PUT) prices on the basis of
the  interest  rate  hike would represent a buying opportunity for PUTs. As Loos  puts  it:  “Looking  past  the cyclical upturn in interest rates, all
three  categories  of  commercial  property maintain very solid longer term fundamentals  in  a strongly growing economy. Any slowdowns, therefore, are expected  to  be  mild,  as I doubt very much whether a construction sector with  so  much  else  on  its  plate  is  capable  of  creating  any  major oversupplies of space right now.”