Tide is turn­ing

Long-term out­look still rosy for com­mer­cial bricks and mor­tar

Finweek English Edition - - Property - JOAN MULLER joanm@fin­week.co.za

HOW QUICKLY MAR­KET sen­ti­ment can turn. When com­mer­cial prop­erty’s movers and shakers flocked to Cape Town for the SA Prop­erty Own­ers’ As­so­ci­a­tion’s an­nual con­ven­tion at end-May this year, the mood was de­cid­edly gloomy. Then prop­erty mar­kets were reel­ing from surg­ing in­ter­est rates and in­fla­tion, stricter credit lend­ing, elec­tric­ity cuts, the prospects of a slow­ing econ­omy and an un­cer­tain po­lit­i­cal out­look. The tide of neg­a­tive sen­ti­ment was most ev­i­dent in the listed prop­erty sec­tor, with share prices fall­ing a mas­sive 25% from Jan­uary to end-May. Back then there seemed lit­tle hope of a re­cov­ery any­time soon.

But two months and a bit on, in­dus­try play­ers who again gath­ered in Cape Town – this time for IPD/Sapoa’s an­nual prop­erty in­vest­ment con­fer­ence – were sur­pris­ingly up­beat about the out­look for SA prop­erty. Del­e­gates who at­tended the event last week had seem­ingly all but forgotten how pro­nounced the down­turn was, no doubt on the back of the strong re­bound in listed prop­erty prices since early July. The in­dex is up more than 20% over the past six weeks.

Con­fer­ence speak­ers said the about-turn had been driven mainly by an im­proved in­fla­tion and in­ter­est rate out­look. By May/June the mar­ket also of­fered great value for bar­gain chasers, with many stocks at their low­est lev­els in two years.

A key mes­sage from the con­fer­ence was that the old adage of real es­tate be­ing a longterm play still rings true. As Colin Young, Old Mu­tual’s head of in­sti­tu­tional prop­erty in­vest­ments, put it: “Prop­erty isn’t a sprint but a marathon.” Young said in­sti­tu­tional in­vestors in par­tic­u­lar con­tinue to back prop­erty as an as­set class, as they’re tak­ing a long-term view. For ex­am­ple, Old Mu­tual In­vest­ment Group Prop­erty In­vest­ments (OMIGPI), with as­sets un­der man­age­ment of R32bn, plans to grow its prop­erty ex­po­sure three­fold to R100bn over the next seven years.

Young said the group’s Tri­an­gle Real Es­tate Core Fund would spend around R1bn to re­fur­bish and ex­pand its ex­ist­ing prop­erty as­sets over the next two years. In ad­di­tion, new de­vel­op­ments val­ued at more than R20bn are al­ready in the pipe­line. Those in­clude two new high rise of­fice tow­ers on Cape Town’s fore­shore, mega-mall Zonki’Zizwe on the Gau­train sta­tion site at Midrand and an “iconic” mixed-use de­vel­op­ment in the heart of Sand­ton.

Oth­ers agreed in­vestors need to find ways to sur­vive short-term cy­cles and con­cen­trate on prop­erty’s long-term growth po­ten­tial. FNB prop­erty strate­gist John Loos told dele- gates that prop­erty re­turns may well get worse be­fore they get bet­ter. “But prop­erty in­vestors need to look through the ups and downs and not be in­tim­i­dated by cur­rent un­cer­tainty. Look to the long-term shape of the coun­try and see be­yond 2010, when many pro­posed projects and new in­fra­struc­ture will be com­pleted.”

Loos said com­ple­tion of mas­sive in­fra­struc­ture and private sec­tor de­vel­op­ment over the next few years would sig­nif­i­cantly boost in­vestor con­fi­dence and prop­erty re­turns. For ex­am­ple, he main­tained prop­erty de­vel­op­ment along the Gau­train’s route would be “worth gold” in 10 years’ time.

Mac­quarie First South prop­erty an­a­lyst Leon Al­li­son held a sim­i­lar view. He said de­spite prop­erty’s re­cent roller coaster ride, real es­tate in SA re­mained a good place to be for long-term in­vestors. He noted listed prop­erty had out­per­formed other in­vest­ment sec­tors for most of the past six years. Al­li­son con­ceded the en­vi­ron­ment for prop­erty re­mained chal­leng­ing over the short term but said SA’s prop­erty mar­ket is in a much health­ier state than most mar­kets world­wide.

He main­tained good prop­erty fun­da­men­tals should sup­port a strong re­cov­ery over the longer term. For ex­am­ple, cur­rent com­mer­cial prop­erty va­can­cies were at their low­est level in 11 years. In ad­di­tion, the mar­ket is fac­ing sup­ply con­straints, which will limit the amount of new de­vel­op­ments com­ing on stream over the next few years. Al­li­son said that was pos­i­tive for the prop­erty cy­cle, as it would sup­port fur­ther rental growth.

Fig­ures re­leased last week by Cat­a­lyst Fund Man­agers showed the SA-listed prop­erty sec­tor re­gained 18% of its losses in July alone, bring­ing the to­tal re­turn for the sec­tor from Jan­uary to July to -15,42%. Cat­a­lyst MD An­dré Stadler says in his monthly over­view that the mar­ket slump since Novem­ber last year and sud­den re­bound from early July holds a few key lessons for in­vestors. “A fo­cus on short-term mar­ket fluc­tu­a­tions can re­sult in in­ap­pro­pri­ate in­vest­ment be­hav­iour. At­tempt­ing to time mar­kets is risky and time spent build­ing an ap­pro­pri­ate long-term in­vest­ment strat­egy is time well spent.”

Not a sprint but a marathon. Colin Young SA much health­ier than in­ter­na­tional mar­kets. Leon Al­li­son

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