South African Property News

Commercial Property Performs Well in 2007

An article on the Engineering News website discusses the commercial property index results released on Monday 31 March 2008. While there has been growing concern about the performance of the South African property market in general, the index indicates a degree of resilience when it comes to commercial property, with a total return of 27.7% for 2007. This is the fourth consecutive year where the results have exceeded 25%.

Despite these promising results, there is a moderate slowdown expected, which is underpinned by an underlying strength in the commercial sector, particularly the office market. According to Stan Garrun, Managing Director of Investment Property Databank (IPD), “Returns in 2007 remained very strong, buoyed by surging demand combined with supply-side constraints. The retail sector dipped with slower consumer spending, but offices and industrial powered ahead. Vacancy rates are now incredibly low across the board, and the best ever rental income growth was recorded in 2007” (Engineering News).

The index was compiled by IPD and the South African Property Owners Association (SAPOA) and based on a portfolio of about 2000 retail, office and industrial properties valued at around R133bn. Last year’s return is up on the 27,1% reported for 2006, but below the 30,1% recorded in 2005. The results show that the last three years have been a period reflecting the highest returns for the index. The strong return in 2007 was largely driven by capital appreciation of 17.7% and an income return that decreased marginally from 9.2% in 2006 to 8.6% last year. There was an unbelievable income growth across all sectors of 17.6% and a further reduction in vacancy levels by 3.1%.

The top-performing sector in 2007 was industrial property, with a return of 33.6%, while offices came in at 30.8% and retail at 26%. FNB’s commercial banking property strategist, John Loos predicts that overall commercial property will slow somewhat, but that offices will emerge the top performer in 2008. CEO of Rand Merchant Bank Properties, Warren Schultze is not so optimistic about the sustainability of the four year 25% plus returns, saying that there are a number of factors working against the positive trend, including the interest rates and their material effect on property and prices, the general outlook and current business confidence, as well as the escalating construction costs and load shedding.

The information in this article is courtesy of Olivia Soraya Spadavecchia (“Commercial property performed strongly in 2007, but moderate slowdown forecast”, Engineering News, 31 March 2008).

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