In March 2008, a number of commercial property focused companies responded to the bi-annual eProp Commercial Property Confidence Index (CPCI) Survey.  Based on a mix of ten equally weighted variables comprising both ‘hard’ and ‘soft’ aspects of business conditions, the index reflects a six month forward projection for the commercial property sector.

The companies*  that responded in March include investors/developers/brokers from the private, listed and institutional sectors, predominantly having a national footprint and with a collective value of property under ownership/control/ management estimated at around R105 billion. The number of responses (29) was consistent with previous surveys, though only a few listed property funds responded.

The overall index (0-100) came down to 56 – with 50 effectively being neutral the reading is still positive overall - but it represents the lowest level reached in the past three years. As such the market has now experienced solid and positive expectations since the survey commenced in February 2005.

Turning to the commercial property sectors: On a net balance basis (-100 to +100 with 0% being a neutral response), whereas the outlook six months ago suggested a positive outlook for all three major commercial property sectors, the situation for Retail Property has now strongly deteriorated (-13%) as is reflected in the graph below. Industrial Property achieved the most positive outlook where the reading was 28% (though down by 20% on 12 months prior). The Office Property outlook remains positive at 20% but down from 35% 6 months earlier and 47% a year ago.

Referring to the below graph, the overall CPCI performance as broken down by the ten equally weighted business issues show that expectations around increasing Net Operating Income (NOI) and Rental Values remain positive. Although expectations for Lease Values, Number of Leases and the Value of Sales is still up, these are nevertheless slightly down on previous readings. The Vacancy Rate expectation achieved a near neutral reading (with only 1% anticipating rates to come down further). The Hiring of Staff remains marginally positive at 8% and Capitalization Rates are expected to increase as supported by a net 33% of respondents.

Concerns around Local level related Management issues have again deteriorated quite sharply to reach its worst level recorded thus far (55%); there is little doubt that the influence of power outages has influenced this reading in particular.

Expectations around increasing Sales Activity is actually up slightly on 6 months earlier, with a net balance of 15% of respondents expecting sales numbers to increase; this is markedly down on 2005/6, where the range was between 29% - 34%. The slight increase may however signal the re-evaluation of investment holdings in light of current local and global economic conditions but generally the lower reading still speaks to the dearth of investment grade stock available on the local market.



At the Sector business level, the strongest expectation of Rental Growth emerged for Industrial Property at 76%, with Offices at 68% and Retail down to 12% (for  Lease Value Growth, the expectations are 64%, 48% and 16% respectively). Sales Activity in the Retail sector is expected to come down (-12%) whereas for Industrial and Offices the level is still expected to increase (36% and 20% respectively).

From a Provincial market perspective, Gauteng respondents are most optimistic on Rental and NOI growth (89% and 78% respectively); it is also the only market where lower cap rates are not anticipated. KZN was the only market where lower sales values are anticipated. Only Gauteng and KZN markets are anticipating taking on more staff. The Eastern and Western Cape were the most optimistic on achieving lower vacancies.

In summary, both Industrial and Office national business expectations see two of the ten factors in negative territory, whereas for Retail the number of negative expectations is five out of ten (number of sales, lower sales values, higher vacancy and cap rates, and of course negative perceptions about the state of play of the public environments in which properties are located in).

Interpreting the CPCI: For investors, the prospects of acquiring property at better prices does exist given the anticipation of lower cap rates (within the context of rising rentals); this observation would appear particularly relevant to retail assets.  For existing owners of direct commercial property, the prospects for continued solid fundamentals appear in place - and as to the debate as to whether offices or industrial will be the better investment - the key no doubt lies in the response of the respective underlying economic drivers and their impact on demand; simultaneously keeping a check on existing and planned supply.

*Participating companies that eProp would like to express thanks to and in alphabetical order are:

• Aidollo - Gauteng
• Ambit Properties Ltd
• Bales Delaporte
• Baker Street Properties – Cape Town
• Blakeway & Associates
• Broll Property Management – Durban and Eastern Cape
• Bruce McWilliams Industries
• Chelsea Manhattan – Cape Town
• Dunbar Property Group
• Encha Properties
• Jezami Investments
• JHI Properties – East Rand
• Kuper Legh Property Management
• Madison Property Fund Managers Ltd
• Old Mutual Investment Group Property Investments – Gauteng, Western Cape and East Coast
• Pam Golding Commercial
• Power Developments
• Propco - KZN
• PIC Syndications Gauteng
• Reardon Investments
• Redefine
• Stand 21 Chloorkop
• Veni View Properties
• Vusani Property Investments
• Wall & Smith – Cape Town
• W Touissaint Trust
  

ENDS: eProp Research, Marc Schneider March 2008