Demand will underpin commercial property growth

The demand for commercial and industrial property seems to transcend the pressures caused by rising interest rates. This anomaly can be attributed to the convergence of two factors. The first is that property values in this sector are driven by the basic

And the second is simply that rising building costs are denting the availability of new commercial and industrial property stock.

The huge demand for commercial property in South Africa is driven in part by continued strong GDP growth. It seems reasonable to assume that the 5% per annum growth of the last year or two will continue till 2010 and beyond.

At the same time, inflation continues to drive the costs of raw materials used in the building process ever higher. Case in point is cement and steel prices - both of which are soaring as government infrastructure projects and 2010 stadium construction finally get underway.

Industrial and commercial yields look impressive

Buy-to-let investors operating in the residential property market have seen their investment yields shrink over the past five years. Returns of 5% to 6% are now the norm in this market. Meanwhile, commercial and industrial property investors are able to secure much better yields.

The average yield on property in this sector is 9% to 10% per annum- with carefully selected properties yielding as much as 12.5%. Reasonable yields should remain the order of the day as vacancies in this sector continue to decline. Quoted in the Sunday Times, head of First National Bank Commercial Property Division, Gerhard Zeelie said: "National office vacancies are running as low as 5% to 6%."

Zoning applications delays remain troublesome

Regulatory delays are pushing up the value of properties which already have commercial and industrial zonings.

New zoning applications take up to 18 months to complete and often involve expensive environmental impact studies. This has led to owners of land with existing commercial rights being able to command steep premiums over un-zoned land.

The shortage of suitable land for commercial development has contributed to a marked increase in the number of residential properties being converted into commercial undertakings. A quick drive down any busy street-front will confirm this. As soon as one residential property is converted to office space, the knock on effect often turns a residential street into a row of office blocks in as little as two years.

Waiting for more clarity on tax incentives

Another development which makes commercial property investment more attractive is an announcement by Finance Minister, Trevor Manuel in his 2007 budget speech. He announced changes to current tax legislation which would allow owners of commercial buildings to depreciate these assets over a period of time. The intention is to allow a 5% write-off per annum over a 20 year period.

The investment world is still waiting for Treasury to clarify how the tax relief will be applied. Speculation is that the terms will apply to new projects only- and that existing developments will not qualify for relief. There is also some confusion as to what type of commercial buildings will fall under the Minister's definition of 'commercial'.

Whatever the outcome, the effect of this change will be that yields on new commercial projects are sweetened, thereby encouraging more commercial property developments in years to come.

Editor's thoughts:
In yesterday's newsletter we raised concern about so-called property investments which lure investors with unattainable returns. As a professional in the industry, what do you consider to be a reasonable return from a property investment? Send your comments to [email protected].