WHILE the uncertainty of global markets haunts investors, the certainty of income streams from commercial property is proving to be relatively comforting for investors.

The South African Reserve Bank has raised the benchmark interest rate five percentage points to 12,5% since June 2006. This was spurred on by a surge in the consumer price index, which is at 13,6%.

The high inflation and high interest rates resulted in weakening consumer purchase power, slowing economic growth in the country.

These factors, coupled with the global economic downturn spurred by the subprime mortgage crisis in the US, have seen equity markets worldwide and in SA fall dramatically.

The listed property sector has also become a victim of the plunging equity markets but has not been hit as hard as other sectors.

Tony Bales, dealmaker at Bales Delaporte Commercial Property Dealmakers, says that while various tenants are feeling the squeeze and interest rates are higher than 24 months ago, income streams from commercial property investments have held up very well in SA.

“Investors have been reluctant to sell their income-producing property assets as these are showing their resilience to downturns — just like they are supposed to in a balanced portfolio of assets,” he says.

While the listed property sector has lost value, Bales says it has continued to increase net incomes consistently year on year and rental growth should continue for a number of years as leases expire and rentals revert upwards to market-related levels.

“Those funds more exposed to the retail sector are likely to have a lower growth in rentals.”

Johann Boshoff, director at JHI Property Services, says although the demand for commercial office space is still holding its own, SA will in time probably see higher vacancies in industrial property.

Boshoff says in order to unlock value in the commercial property sector you need to decide carefully on your property objectives, improve rental collections, tenant retention and focus on more structured procurement. As an investor, he advises that you look at extending the scope of your property management services beyond leasing, maintenance and rent collection.

Boshoff says the reduction of operating costs that value-added services such as procurement and facilities management can generate are significant. “In some cases savings of 20% to 30% have been realised by utilising specialised procurement methods.”

Lastly, he advises that you find a company that is more than an agent or broker for rental space, and that you look for a partner who can help on a more strategic level to assess your objectives and return on investment.

However, according to Bales, property assets that do not show a positive cash-flow have been put under severe pressure, and vacant land and vacant buildings are proving more difficult to sell in the current market — perhaps because financiers are taking a far more conservative approach.

“With the global turmoil likely to last longer than initially anticipated, commercial property investors need to plan and strategise accordingly,” says Bales.

With the average lease term for a commercial property being three to five years, tenants wanting longer leases should be taken seriously because whatever can be done to enhance the medium-term certainty of income streams will enhance a property's value. It is that sort of certainty that many current investors (and financiers) are seeking.

“Conversely, value investors are circling like vultures on any opportunity that may show uncertainty and consequently a perceived reduced price,” says Bales. Such investors often have the cash and know-how to add significant value to buildings. Throw in certainty to one’s income streams, and value will follow, says Bales.

Source: Business Day