Tide is turning
Long-term outlook still rosy for commercial bricks and mortar
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