SA commercial property remains safe haven for cautious investors in 2014

gerrie-jan2013Quality commercial and industrial properties in South Africa will continue to boast yields comparative to most other investment classes in the near future, despite the market remaining as flat as it has over the past five years.

This is according to Gerrie van Biljon, Executive Director at Business Partners Limited, who says that the company, which oversees a property portfolio of nearly R1 billion, is optimistic about the property market as an investment haven in 2014, despite the possible risks to the sector.

Van Biljon believes that the South African property market is less exposed to shocks in the global economy as, for example, the stock markets. “Any of the imminent setbacks to the global economy, such as 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.”

The fact that there are very few bargains to be found in South Africa’s commercial property sector – particularly manufacturing and retail space – despite the economy’s sluggish crawl back from the recession, proves the market’s status as a solid investment in difficult times, says van Biljon.

“Business owners that have been under pressure since the property boom, which ended in 2008, have either exited the market or now have their affairs in order. Investors also tend to hang onto their property investments rather than disposing of them in order to invest in low bearing return categories, and as a result few good property investment possibilities enter the market. The consequence of this is that capitalization rates remain virtually unchanged, meaning the price of commercial and industrial properties did not take a major dip, unlike the residential market where prices fell.”

Van Biljon says that the exception is however the office space 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 as the high level of vacancies places tenants in a strong negotiating position. This in turn also keeps the market values down and results in a less attractive option for investors.

“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.”

He says that the anaemic economy will also continue to pull down rental escalations for commercial and industrial properties in the year ahead. “Tenants are increasingly opting for shorter leases, and landlords are struggling to attain a 10% rental increase due to tenant’s good position to bargain – 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.”

Of more immediate concern for property owners is the increase in the cost 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 as should it go up, property values will stagnate as the investment becomes less affordable and attractive.

Van Biljon says that given the mentioned risks, thought should be given to buying a property with a co-investor, rather than through financing, in order to spread exposure to risk. “Business Partners has co-invested in many retail and industrial complexes in addition to purchasing such property outright. In this way, we are likely to increase our sizeable property portfolio in the coming year – the surest vote of confidence in the investment value of the sector.”

He however stresses that optimism for the investment value of property in 2014 is reserved only for good-quality commercial and industrial stock, namely 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 therefore be seen as a long-time investment,” concludes van Biljon.