»
May 28, 2007:
In each of the three commercial property sectors – office, industrial and retail – vacancy rates have fallen considerably and are currently at historically low levels
And this doesn’t look like it will change any time soon. The implications for the Property Unit Trust (PUT) industry are interesting and it is likely that rentals will rise well in excess of the inflation rate.
“There are enormous constraints in construction at present,” states John Loos, property strategist at FNB Commercial Banking, “so I expect these vacancy rates to remain low for many years to come. This implies that rental incomes will rise considerably in future.”
There are huge infrastructure projects currently being undertaken, some for the 2010 World Cup, others not. The commercial property sector must compete with these projects for resources, both materials and skills, and this is leading to a supply-side crunch. Building and construction inflation is widely expected to outpace other inflation rates over the next five years. This will feed into higher rentals and therefore very good returns for the property industry.
Michael Levin, a senior investment manager at Cannon Asset Managers, agrees. “With rising building costs and input shortages, developers will be less inclined to embark on new projects,” he says. “This will, in turn, aggravate the already limited supply of space.”
Vacancy rates in each of the sectors have declined markedly over the past four or five years, as can be seen in the table below:
Sector
Peak year
Peak Vacancy rate
2006 vacancy rate
Industrial
2001
12%
3%
Retail
2002
7%
3%
Office
2002
24%
7%
Source: Investment Property Databank
Although all the sectors have low vacancies at present, the level for offices is somewhat higher than the other two. As Levin points out, this implies that the office market has the greatest scope for growth in the near to medium term, assuming that all other things remain the same.
Of interest, the total return from the office sector during 2006 lagged that of both retail and industrial space, something which has baffled market commentators. The industrial sector returned 31.1% during 2006, the retail sector saw a return of 27.4%, while the office sector return was somewhat lower at 24.5%.
The capital growth in office properties was below that of the other two, although the office sector still had relatively strong net income growth. Indeed, income growth was above that of the retail and industrial sectors. This income growth is not flowing through into revaluations and the office sector did not experience a rerating in 2006. This would indicate that valuers were conservative in their 2006 valuations, thus providing a further reason to expect the office sector to outperform its counterparts in the near term.
Levin notes that “the fundamentals are excellent for the property industry as a whole. Interest rates are stable and the economy is in a healthy state, so the outlook is positive. It is really a matter of degree and, on balance, the office sector is tipped to see above average returns this year.”
Craig Hallowes, spokesperson for the Association of Property Unit Trusts notes that “the Association expects that all PUTs will benefit from this tightness in the market. Perhaps those Puts with a higher exposure to the office sector will see greater performance in the near term, but the overall conditions are extremely favourable to the whole industry.”
