Commercial Property Steams Ahead

While residential property prices in South Africa are coming off the boil, the commercial and industrial market is steaming ahead. All indications are that 2007 will be another buoyant year. By Kara Michaels

According to Neil Main, executive director at Absa Mortgage Fund Managers, while residential property prices in South Africa are coming off the boil, the commercial and industrial market is steaming ahead. All indications are that 2007 will be another buoyant year.
"The office and industrial property markets are expected to do particularly well this year," he says. "Demand for prime quality office space should continue to grow under the current favourable economic conditions, resulting in a reduction in vacancies and continued upward pressure on office rentals."
According to Ken Reynolds, divisional director of Nedbank Corporate Property Finance Gauteng, this pertains especially to pockets of offices like the Sandton CBD.
Main is of the opinion that the industrial property market is looking even more favourable, with the manufacturing sector likely to enjoy an increase in economic activity leading up to South Africa's hosting of the 2010 World Soccer Cup. "This will sustain low vacancies and higher rentals in industrial properties," he says.
"Rising demand for industrial space, coupled with higher building costs and a shortage of industrial land - especially in Durban, Cape Town and Gauteng - should result in increases in industrial rentals outpacing those of the other commercial property sectors."
Reynolds adds that the shortage of industrial land has been brought about by the zoning process and the enforcement of urban fringe development by local councils.
"With the outlook favourable for office and industrial property in 2007 and beyond, major institutional investors are likely to maintain a significant exposure to these sectors. This could be either directly or through JSE-listed property loan stock companies and property unit trusts with large exposures to office and industrial properties in their portfolios," says Main.
What commercial property choices are available to individual investors and smaller institutions?
"The JSE-listed securities route is one, of course, but many commentators believe investment returns will probably be much lower than over the past three years," says Main.
"The other is a direct investment in commercial property. While this avenue used to be beyond the financial reach of many investors, there are now some attractive opportunities in sectional title office and industrial property developments."
The table below shows a selection of sectional title developments financed recently by Absa Mortgage Fund Managers. "The initial yields are attractive and the prospects for capital growth are, as already indicated, excellent," says Main.



Reynolds points out though that the entry level for individual investors for sectional title developments is quite expensive. "Investors would require between R500 000 to R1 million in cash or equity to invest in sectional title developments," he says. "Also, because of less tenants, the risk profile on income is higher and there will also be movement of tenants.
"Therefore, I feel that if investors go for larger commercial property or listed funds, their income would be more secure." – Kara Michaels

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