FNB: Property outlook remains bullish

The outlook for property performance remains bullish, especially in the area of commercial property, according to First National Bank (FNB).

This is based on FNB's view of further mild declines in interest rates and real economic growth of between 4% and 5% per year for the rest of the decade, says FNB property strategist John Loos.

As always, there are risks to such forecasts, he points out. Interest-rate hikes alone, however, are not the key risk, Loos says.

"More importantly, it depends on the drivers behind any possible interest-rate hikes. Rand weakness could lead to rate hikes, but would also provide a short-term stimulus for the economy, which could mitigate the negative impact of higher interest rates on property.

"An oil price shock, on the other hand, could be far more damaging property, with the potential to drive interest rates higher as well as severely harming global and local economic growth," Loos says.

He points out that one of South Africa's big property booms in the early 1980s took place amid rising interest rates.

"Rising interest rates always pose some risk to property. However, if the driver of inflation and interest-rate hikes is also a growth driver, the negative impact may be limited, as in the case of rand weakening which is a short-term growth stimulus.

"FNB's base case is not one of rising interest rates, however, and the property outlook continues to appear solid. Ironically, a sharper than expected strengthening in the rand, which would not cause interest rates to rise, may be as significant a short-term risk to property due to the near-term pressure that it could put on economic growth in the absence of a swift response by the South African Reserve Bank, especially in the area of industrial property," Loos states.

Source: Mail and Guardian - www.mg.co.za

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