Res­i­den­tial re­turns play catch-up

Com­mer­cial prop­erty no longer best bet

Finweek English Edition - - INSIGHT - JOAN MULLER joanm@fin­

THE PER­FOR­MANCE GAP be­tween com­mer­cial and res­i­den­tial prop­erty has nar­rowed, with buy-to-let flats now spin­ning bet­ter prof­its than shop­ping cen­tres, of­fices and fac­to­ries. The lat­est Sapoa/IPD South Africa prop­erty in­dex re­leased last week showed com­mer­cial real es­tate – in­clud­ing the re­tail, of­fice and in­dus­trial sec­tors – de­liv­ered a to­tal re­turn of 13,3% last year, which com­prises cap­i­tal growth of 4,1% and an in­come yield of 8,9%.

Of­fices were the best per­form­ing com­mer­cial prop­erty sec­tor in 2010, with a to­tal re­turn of 14%, fol­lowed by in­dus­trial build­ings (13,6%) and re­tail (13,1%). Al­though the to­tal re­turn for com­mer­cial prop­erty at 13,3% was well up on 2009’s 11-year low of 8,8% (see graph) res­i­den­tial prop­erty staged an equally im­pres­sive come­back last year.

Al­though SA doesn’t have a sin­gle in­dex that tracks the to­tal re­turns for res­i­den­tial prop­erty, tak­ing data from both Absa and First Na­tional Bank the to­tal re­turn for res­i­den­tial buy-to-let was 14,6% last year. That’s based on a 6,8% av­er­age house price in­crease recorded by Absa last year, cou­pled with a 7,8% av­er­age gross in­come yield recorded by FNB’s res­i­den­tial rental in­dex in 2010.

Res­i­den­tial prop­erty recorded stronger cap­i­tal growth than all sec­tors of the com­mer­cial prop­erty mar­ket last year: 6,8% against 4,4% for shop­ping cen­tres, 3,9% for of­fices and 3,2% for in­dus­trial build­ings. But com­mer­cial prop­erty beat the hous­ing mar­ket on the in­come re­turn front, with re­tail at 8,3%, of­fices at 9,7% and in­dus­trial build­ings at 10%, which com­pares with 7,8% for res­i­den­tial buy-to-let.

Last year was the first time in a num­ber of years that res­i­den­tial buy-to­let re­turns over­took com­mer­cial prop­erty. In 2009 house prices dropped for the first time in al­most 20 years (-0,3%, ac­cord­ing to Absa), bring­ing the to­tal re­turn for res­i­den­tial prop­erty to around 7%. At the same time, com­mer­cial prop­erty de­liv­ered an av­er­age 8,8% to­tal re­turn. Com­mer­cial prop­erty’s lead was also markedly higher in 2007 and 2008.

How­ever, it’s un­cer­tain whether res­i­den­tial prop­erty in­vest­ments will con­tinue to out­per­form their com­mer­cial coun­ter­parts this year. Cur­rently, prop­erty econ­o­mists – such as Absa’s Jac­ques du Toit – ex­pect house price growth to slow to around 1,5% for the year as a whole. But the good news is res­i­den­tial rental yields are likely to rise over the next 12 months on the back of a strong ac­cel­er­a­tion in rental growth.

FNB prop­erty strate­gist John Loos says it ap­pears de­mand for rental ac­com­mo­da­tion is start­ing to out­strip sup­ply in cer­tain ar­eas. That ap­plies par­tic­u­larly to flats, an in­di­ca­tion of more ten­ants down­scal­ing to smaller, cheaper prop­er­ties. Flat rentals were al­ready up an av­er­age 8,6% in fourth quar­ter 2010 year-on-year (from 6% in the third quar­ter).

Loos says the fact that fewer in­vestors are putting money into buy-to-let prop­er­ties also means a lim­ited amount of new rental stock should come on to the mar­ket over the next six to 12 months. That should place fur­ther up­ward pres­sure on rentals, trans­lat­ing into higher in­come yields on res­i­den­tial prop­erty over the course of 2011.

Lat­est FNB fig­ures show only 7% of all hous­ing sales went to buy-to-let in­vestors in fourth quar­ter 2010 – a far cry from the 25% av­er­age recorded by FNB dur­ing the boom years be­tween 2004 and 2007.

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