Commercial outperforms residential

Investors who switched from residential to commercial property over the past year are now in the pound seats. Latest figures released by Cape-based Catalyst Fund Managers show that the JSE's R91bn listed property sector delivered a total return of 21% for the 12 months to end-May 2009, constituting capital growth of around 12% and an income return of 9%.

That is in stark contrast to data released earlier this week by Absa which shows that capital growth earned on residential bricks and mortar is down 3,6% in May year-on-year (y/y). That represents the biggest house price drop recorded by Absa since late 1986.

To do a fair comparison, one needs to consider the potential income return earned from buy-to-let residential properties. Latest figures from property group Rode & Associates places gross rental returns for buy-to-let flats and townhouses at an average 8%.

That means the current total annual return from residential property is in the region of 4,4%, which of course compares poorly with the 21% total return of the SA listed property sector.

Catalyst Fund Managers MD, Andre Stadler, says the performance of listed property stocks have generally held up well. He attributes this to property companies' ability to continue to grow the income earned from underlying shopping centres, offices and industrial buildings despite an uptick in vacancies and rental arrears.

Most listed property fund are still reporting inflation-beating income growth in the region of 8% to 10%. Stadler says market consensus is that income growth for the sector is set to remain around the 8% mark for the next few years.

However, the picture looks less rosy for the residential property market, both on the income and capital growth side. Figures from rental portal www.rentproperty.co.za show that asking rentals in the residential market have dipped in recent months - from an average R6,807 three months ago to the current R6,169.

Jacques du Toit, sectoral analyst for secured lending at Absa Retail Bank, expects house prices to decline further over the next few months. "Despite the 450 basis points cut in interest rates since December 2008, the residential property market is expected to remain depressed until late 2009," Du Toit says.

Du Toit notes that an underperforming economy will continue to negatively affect employment, household income and consumer confidence that will continue to place a lid on housing demand. -

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