Business property remains safe haven for careful investors
Only economists are brazen enough to predict the future and Owen Holland states upfront that he is no economist. But as Business Partners’ property investment general manager, overseeing a portfolio of close on R1 billion, his feeling of optimism for the property market as an investment haven in the coming year is not entirely a thumb suck.
Holland says even if the market remains as flat as it has over the past five years or so, quality commercial and industrial properties still boast yields above most other investment classes, and will probably continue to do so in the near future.
He believes that the South African property market is not as directly exposed to shocks in the global economy as, for example, the Johannesburg Stock Exchange. Any of the imminent setbacks to the global economy, for example the raising of the close-to-0% interest rates of the developed world, or the tapering off of America’s policy of quantitative easing will reflect immediately in the JSE indices, but not necessarily in property values.
Holland questions the notion that overseas investors seeking higher returns in emerging markets are actually buying individual properties in South Africa. They are more likely to invest in shares of listed property companies. It is therefore unlikely that South African property values are being propped up by fickle overseas money.
For Holland, the fact that there are very few bargains to be found in the South African commercial and industrial property despite the economy’s sluggish crawl back from the recession proves the market’s status as a solid investment in difficult times.
This goes for factory and retail space, but the exception is the office sector, which is likely to suffer from stubbornly high vacancy rates in the near future as it has for the last few years. Owners of non-premium office blocks are therefore unlikely to get the rental escalations for 2014 that they would like. The other side of the coin is that there are probably a few bargains available in the office sector for investors who are willing to wait for optimal return.
The anaemic economy will also continue to pull down rental escalations for commercial and industrial properties in the year ahead, says Holland. Once again property owners will struggle to attain a 10% rental increase – a far cry from the 9 to 14% increases they could apply a few years back. If such weak escalations continue, they are likely to put pressure on the long-term value of property, he says.
Of more immediate concern for property owners, however, are the increases in the costs of maintaining and managing properties, such as wages for cleaning staff and security guards, maintenance services, municipal property rates and electricity charges. These costs are difficult to control, but have a major impact on the return on investment that a property brings to a portfolio.
Under such difficult circumstances, it becomes even more important for an investment property to be well managed to maintain its value. Business owners and investors who are too distracted to pay attention to their properties, are well advised to appoint professional property managers.
The interest rate is another risk factor to consider. If it goes up, the property values will stagnate, says Holland. Given that the interest rate has been at an unprecedented low for a while, it is more a question of when it will go up rather than if.
Spreading your risk by buying a property with a co-investor rather than through financing should therefore be given serious thought. Business Partners has co-invested in many retail and industrial complexes in addition to purchasing such property outright.
In this way, Business Partners is likely to increase its sizeable property portfolio in the coming year – the surest vote of confidence in the investment value of the sector.
But Holland stresses that his optimism for the investment value of property in the year ahead goes only for good-quality commercial and industrial stock – well situated, well managed, accessible, secure factories, warehouses and shops with adequate facilities. Prospective buyers are better off worrying about these factors rather than the unpredictable ups and downs of the economy as it is difficult to time the market and property must be seen as a long-time investment.
Business Partners Limited co-invests in properties and offers up to 100% commercial property loans. For more details email firstname.lastname@example.org. Terms & Conditions apply.