Fnb: Retail Slows, Industrial Is In

Kara Michaels hears what John Loos, property economist for FNB's Commercial Property Finance division, has to say on the commercial and industrial property sector from vacancy rates and retail property fundamentals to industrial and office space.

Vacancy rates declined further in 2006
According to Loos, the biggest decline in vacancy rates came in the laggard office property sector from 10,5% to 6,9%. "Retail vacancy declined from 4,1% to 3,3%, while industrial vacancy went from 4,1% to 3,2%," says Loos. "Therefore, even in the leading retail sector, in which huge additional space has already been created, vacancy rates remain low."

Soft landing for the consumer
Loos points out that new vehicle sales growth has been leading the way more slowly since 2005 and that real retail sales growth is set to follow vehicle sales growth at a lower pace.

He also points out that the household debt situation is not in a crisis. "Even though the debt-to-disposable income ratio is at an all time high, the debt service ratio is manageable despite having risen off a low base," he says.

Retail property fundamentals point to further near-term slowdown
Loos points out that 2006 was the second year of decline in net income growth. "At 7,4%, and slowing consumer demand growth expected, how much lower can net income yield go?" he asks.

"The combination of rising completions of new stock and slowing growth in real retail sales is taking the additional real retail sales per square metre lower.

"However, the ARRS per square metre ratio is still high by historic standards, leading to the expectation of a 'soft landing'."

Industrial space is the place to be for now
Loos explains that at 9,5% industrial income growth and income yield, and with accelerating net income growth, further yield compression appears achievable in this property category.

"This property category is more linked to manufacturing as well as the broad economy as opposed to retail, which has a far stronger consumer link," he says. "The broad economic slowdown in 2007 is expected to be less significant than the consumer demand slowdown.

"And even though supply of new stock is rising, it is not yet at a level where it looks like it will make a dent in the low vacancy level."

Office space – still plenty of upside
Loos points out that at 9,5% and with sharply accelerating net income growth, further yield compression appears likely. "Vacancy rates appear to have passed the natural rate and, in addition, despite plans passed having risen quite significantly, completions fell last year," he says.

Of interest is that Johannesburg's decentralised office nodes have recorded a 13% increase in rentals for A-grade offices (under 10 years of age), Pretoria a 11,1% increase and Cape Town a 5% increase. With regard to Durban, a newsletter from property economists Rode & Associ¬ates informed readers that nominal rentals for its A-grade offices increased 20% for the fourth quarter of last year compared with the same period a year earlier. It attributed this to the fact that Durban's office market is less speculative than the other major office areas.

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