Prop­erty: The next big thing

Finweek English Edition - - COVER -

irect com­mer­cial prop­erty will make a come­back.” This i s ac­cord­ing to in­de­pen­dent in­vest­ment con­sul­tant Dries du Toit, who was speak­ing at the 13th IPD SA Prop­erty In­vest­ment Con­fer­ence, held in Cape Town in mid-Au­gust.

It’s a pre­dic­tion that many will heed. In the past 15 years Du Toit has r ung three bells. In 2003 he pre­dicted that listed prop­erty would be­come the best as­set class. Ex­actly as he pre­dicted, l i sted propert y out­per­formed all other as­set classes de­liv­er­ing re­turns in ex­cess of 20%. Five years on, he pre­dicted a US hous­ing mar­ket bub­ble and in 2011 he ad­vo­cated di­ver­si­fy­ing over­seas when the dol­lar was a ‘mere’ 6.50 to the rand.

The di­rect propert y boom of the 1980s and 1990s was dealt a blow by high in­ter­est rates, lack of liq­uid­ity, in­ner city de­cay and listed prop­erty cap rates ris­ing to be­tween 18% and 20%. Pre­dictably, l isted prop­erty be­came a far more at­trac­tive in­vest­ment.

But fu­ture listed prop­erty re­turns are likely to be sub­stan­tially lower, around 9% ac­cord­ing to Du Toit. The rerat­ing of listed prop­erty is not the only rea­son he be­lieves di­rect (un­listed) prop­erty and specif­i­cally di­rect com­mer­cial prop­erty will be the best per­form­ing as­set class over the next five years. Di­rect com­mer­cial propert y, he says, out­per­formed bonds and cash, pro­duced eq­ui­ty­like re­turns in ad­di­tion to be­ing less volatile than eq­ui­ties.

Di­rect prop­erty, says Du Toit, is cheaper than listed prop­erty, is an above-av­er­age risk-ad­justed longterm in­vest­ment that is not only at­trac­tive for l isted prop­er­ties in terms of takeovers, but is also sought a f t e r by p e nsion f unds, l i fe off icers and re­serve funds.

Back­ing up his conv ic­tion that di­rect com­mer­cial prop­erty will be the next Cin­derella as­set class to demon­strate t he best value per unit of risk, Du Toit s a y s d i s t r i but i on g r ow t h i s e x p e c t e d t o match inf l ation, the val­u­a­tion dis­count rate is in ex­cess of 10% per an­num, volatil­ity is low and the exit cap rates are just be­low sin­gle dig­its. To­tal re­turns, he be­lieves, will ex­ceed 10% and could even yield 14% at a low level of risk. If Euro­pean trends are any­thing to go by, this could be Du Toit’s fourth bell. In Europe, sig­nif­i­cant in­vest­ment into the com­mer­cial real es­tate in­vest­ment mar­ket has pro­duced the strong­est first half for eight years with €135.3bn (R1.9tr) of in­vest­ment ac­tivit y. Driven by r e c ord t r a nsac t i on lev­els of i nv e s t ment in Lon­don as well as strong lev­els in the Nordic re­gions, Ibe­rian Penin­sula and i n Ita l y, t he as­set class has e x per i enced a 37% g r owth i n in­vest­ment com­pared with the same pe­riod last year ac­cord­ing to Real Cap­i­tal An­a­lyt­ics (RCA).

DI­RECT COM­MER­CIAL PROP­ERTY OUT­PER­FORMED BONDS AND CASH, PRO­DUCED EQ­UI­TY­LIKE RE­TURNS IN AD­DI­TION TO BE­ING LESS VOLATILE THAN EQ­UI­TIES.

As SA’s fi­nan­cial and busi­ness cen­tre, Sand­ton has seen an ex­plo­sion in com­mer­cial de­vel­op­ment.

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