Industrial property is expected to produce the best returns of the three commercial property categories over the next two years. Offices will outstrip industrial after that, reckons John Loos, FNB’s property economist.
According to the IPD (Investment Property Databank) results for 2005, industrial properties “were last year’s star, returning a remarkable 33,1% compared with 24,4% a year earlier”.
The results also revealed that the greatest drop in vacancies were in offices.
“All property sectors produced good results especially industrials and retail, reflecting a growth economy and advantageous interest rate and inflation environments leading to a resurgence of confidence, burgeoning rental and occupancy markets and resultant capital appreciation”, said Stan Garrun, managing director of IPD, South Africa.
Many property owners worry about interest rate hikes but property performance depends on more than just rising interest rates argues Loos.
Loos explains that FNB’s bullish property performance outlook is premised on a further mild decline in interest rates and real economic growth of between 4% and 5% per year until 2010.
“The major risks are the events that can impact negatively on both inflation and growth”, he explains.
He says property is not just about interest rates but the drivers of those rates, the cause of the interest rate hikes and real economic growth performance.
Rand weakness could introduce higher inflation and rising interest rates, but this weakness may have a limited negative impact, adds Loos, as it did in 2002 when interest rates rose by 4% but average property prices rose by 15%.
“The relatively moderate response by the Reserve Bank allowed the weaker rand to actually provide a short-term stimulus to the economy by providing greater protection for local industries against import competition while simultaneously making exports cheaper in hard currency terms,” explains Loos.
He says a rapid move in the oil price, with no strengthening of the rand, poses a significant risk.
“The could introduce inflation into the economy while also negatively impacting economic growth through creating recessionary conditions globally and thus curbing demand for the country’s exports”, adds Loos.
