Real estate experts ponder whether roaring returns can be repeated again by physical property.
Double-digit returns of not far off 30% for last year have left property investment fund managers and other professionals in the commercial real estate sector delighted with their annual performance.
But can the roaring returns, no doubt among the best physical property performances in the world in 2007, be repeated again this year?
That's the question on many investors' lips following the release this week of the much-awaited SAPOA/IPD South Africa Annual Property index.
The index measures physical commercial property performance, drawing on figures supplied by big landlords.
The last three years have seen the highest returns in the history of the index:
For 2007, the figure was 27,7%
In 2006, investors enjoyed 27,1%; and
In 2005, the return was 30,1%.
The strong return in 2007 was mainly driven by capital appreciation, which - said the IPD's managing director Stan Garrun - at 17,7% is the second-highest recorded since 1995.
Income return of 8,6% was slightly down on the 2006 value of 9,2% "due to the higher capital values realised".
Vacancy levels have reduced and yields continue to fall in all sectors. The all property yield was down to 7,6% at the 2007 year-end, noted the IPD number crunchers.
Top-performing sector was industrials (33,6%), followed by offices (30,8%) and then retail (26%).
As Warren Schultze, chief executive officer of RMB Properties, said this week, the figures for the past few years of more than 25% really are "phenomenal".
"One has to question returns of this magnitude," he said, noting that the percentage translates into an after-tax return of almost three times the rate of inflation.
John Loos, the property strategist for FNB who was with Schultze on a presentation roadshow this week, agreed that "it doesn't get much better than this" on the commercial property scene.
"Enjoy it while it lasts," he told property owners.
Schultze suggested it was difficult to assess where the market is heading. Among the issues are financial markets, with valuators in the UK writing down property quite strongly, domestic interest rates that "haven't behaved" in a way that economists predicted two to three years ago, and of course negative sentiment.
Nevertheless, said Schultze, cash flows are "still robust", with rentals growing.
Rising construction costs and power constraints are good, too, for those who already own property.
"Property is the ultimate hedge where there is a danger of inflation," he added.
Loos is upbeat about commercial property on the whole. Latest private sector credit figures show commercial new loans "rebounding reasonably well" - a sharp contrast to residential mortgages, which are showing slowing growth.
Loos said 2008 could be office property's "big year".
Retail property - like shopping centres - has been leading the cycle, and has a couple of years of "relative pain and suffering", said Loos, while industrial faces "issues" with a slowing manufacturing sector.
Although the economy is set to take some strain, and by implication tenants, from a property returns point-of-view, a relative shortage of land and space is "extremely good".
Loos believes it would not be a good idea for the SA Reserve Bank to increase interest rates again, as the major drivers of inflation now are global food price inflation, oil price inflation and rand weakness.
Consequently, another rate increase could fuel inflation.
He said: "In recent years, we believe capital flows have been growth-seeking and...not just because of the interest rate differential."
Another interest rate increase would deter growth-seeking capital flows and would be bad for the rand's value relative to hard currencies, Loos cautioned.
Meanwhile, property fund manager Keillen Ndlovu of Stanlib asset managers, said he expects 2008 to prove to be "another resilient" year for commercial property owners particularly in the office and industrial sectors.
Ndlovu, whose fund invests in commercial property through listed stocks and takes monthly minimum investments of R200, said a "major concern" is the retail side.
Like Loos, he thinks office property is set to outperform industrial real estate, largely because industrial has run hard.
Valuations might weaken, but they won't go negative, is his prediction, while he believes yields have "bottomed out".
"It won't be as strong as 2007, but will be good compared to bonds and cash," adds Ndlovu.
