Commercial property defies logic
Property analysts remain upbeat on prospects in the sector despite the numerous challenges facing local businesses. Craig Hallowes, spokesperson for the Association of Property Unit Trusts (APUT), recently said commercial property delivered returns in line with the best-performing asset classes through 2009. He predicted 2010 would be another good year. Are prospects for the sector as good as Hallowes’ would have us believe?
Commercial property comprises a complex mix of offices, shopping complexes, industrial factories, warehouses and distribution centres, and hotels. Our first observation is the outlook cannot be positive across all commercial property categories. Our second is the major disconnect between ‘technical’ and ‘real’ economies. South Africa Inc may be shaking off the vestiges of its first technical recession in 17 years, but the real economy remains on shaky grounds. Retail sales could disappoint this year as the reality of last year’s million job cuts hits home. And the GDP growth that pulled the country from technical recession is deceptive. We’re not seeing a phenomenal recovery, but rather what sensible economists refer to as a ‘base effect’, gradual improvements from worrying lows.
Investors backed listed property in 2009
The high-yielding SA Property Unit Trusts index (JSE: PRUT) moved from 344 to 371 points in 2009, delivering a 7.8% capital return. Total returns from the sector topped 16.5% on the back of the average 8.78% yield. “Investors exposed to the South African commercial property sector are likely to be in a festive mood and – on the whole – quite happy with the last twelve months,” said Hallowes. The local listed property market ranked among the top three markets globally!
There are a number of reasons for the strong performance Hallowes believes one of the contributing factors is the shortage of available ‘stock’ on the local exchange. Investor interest in high-yielding asset classes tends to peak when doubt creeps in to the market. Another plus for local property shares is that South African banks weren’t as affected by the credit crisis as their Western peers. “Our banking sector has been better managed and that, coupled with the lack of major failures, is reflected in the market’s comparative lack of volatility throughout 2009,” said Hallowes. Increases in the number of defaults and rental reversions were not enough to dent enthusiasm for the sector.
Conflicting views
Rode & Associates, experts in the local property space, contradict this upbeat assessment. In a November 2009 update they reported “scant improvements” in SA property. The group concluded: “While property’s PR machine may have started talking about green shoots appearing, the facts reveal that the brakes − in terms of the growth in market rentals − are being applied more firmly now!” Office rental growth, for example, is confined to certain nodes in central business districts. Rode & Associates said rental growth in most decentralised areas was now in single digits. Industrial rents were even more disappointing with many areas recording flat or contracting growth. Property investors will have been disappointed by Q2 2009 industrial rents in the Cape Peninsula (+4%), Port Elizabeth (0%) and Durban (-1%).
Rode & Associates’ latest press release declares that rental markets continue to wane in spite of SA’s emergence from recession. The Q4 2009 assessment of local rentals points to weak conditions across the commercial, industrial and residential arenas. Annual rental growth for office space in Johannesburg and Cape Town (decentralised) fell to below 2%. “The effects of softer economic activity on the demand for industrial space – and consequently its effect on market rentals – are also becoming strikingly evident,” said property economist, Erwin Rode. Traditional industrial hubs such as the East Rand (+5%) and Central Witwatersrand (+2%) failed to achieve real rental growth, while market rentals actually contracted by 5% in Durban and 16% on the West Rand.
Investors in listed property should consider the consequence of these declines carefully. Rode observes: “The principal risk to the outlook for capitalization rates remains the scaled-down expectations regarding the direction of real rentals.” Property investors will want higher income returns (yields) which can only come from deflated capital returns!
What does the future hold?
Property is similar to other asset classes in that it ‘trades’ through boom and bust cycles. Although we doubt a repeat of 2009 performance this year, the long-term outlook for commercial property remains solid. Infrastructure developments in the run up to the FIFA 2010 Soccer World Cup ™ will have a long-term positive impact on commercial property. Transport system upgrades should benefit business as a whole – and improved business conditions underpin commercial rents.
The Gautrain rapid rail system has already stimulated growth in a number of existing business nodes (such as Rosebank and Centurion) and will undoubtedly create new centres for business too. Public transport improvements in Cape Town, Johannesburg and Durban will have similar outcomes. “South Africa is the hub of Africa, and the World Cup will entrench that for now, but we are still part of the global economy and, while there has been a tick up in economic growth, there is still a fair way to go to sustained global economic recovery,” said Hallowes.
Editor’s thoughts: Landlords may experience some resistance when they renegotiate rental contracts this year. Small businesses are under tremendous pressure due to administered price increases, and – with many already working to ‘pay the landlord’ – many will close up shop before signing another multi-year escalating rental agreement. Will you take a hard line when negotiating your next rental contract? Add your comments below, or send them to [email protected]
