Property: The next big thing
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.