Impact of oversupply

Posted On Wednesday, 23 May 2001 03:01 Published by
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OVERSUPPLY continues to dominate most sectors of SA's property market as the development of megaprojects in cities gains impetus, with industry players hoping for further interest-rate cuts to give the sector a boost.

OVERSUPPLY continues to dominate most sectors of SA's property market as the development of megaprojects in cities gains impetus, with industry players hoping for further interest-rate cuts to give the sector a boost.

Property analysts say the development of megaprojects of a multifaceted nature is not a new phenomenon, but has gained impetus over the past two years.

In the case of Johannesburg, Durban and Cape Town, the projects are all channelling development energies in a northerly direction and dramatically influencing future growth patterns, says JHI Real Estate brokers.

The projects coming on stream include Cape Town's Century City, Johannesburg's Melrose Arch and the Montecasino complex in Fourways.

Trevor Hosiosky, investment manager of Colliers RMS, says there has been a tremendous surge in decentralised office developments in the past few years.

"We believe these new developments will taper off until supply and demand are in equilibrium," he says.

Most analysts agree that oversupply will continue to be a theme of the commercial, industrial and retail property markets for some time.

Liberty Properties MD Jim McLean says that to combat the situation, commercial property owners are using increased fitout allowances and moving-in allowances to attract tenants to their premises.

He says this means it is often more attractive for a tenant to move to new premises at the end of a lease, and this regular relocation means it is difficult for owners to retain tenants.

"The result is a lack of growth in the industry as a whole."

Rodney Luntz, of property consultants Abro Luntz says the oversupply is posing new questions for developers and property owners, suggesting a need to change leasing strategies.

He says many property owners have yet to accept that the market has turned. With supplies of A-grade space growing across the board it is rapidly becoming a tenants' market.

"Strategically, property owners and developers should be bending over backwards to sign up quality tenants by being highly negotiable on lease terms to secure long-term income revenue streams of five years or more."

Industry players have also had to contend with fundamental shifts in the market, says Theodore Yach, MD of Golding Commercial Properties.

In the late 1980s and early 1990s institutions were the main investors in the sector.

However, due to prescribed asset provisions and the lack of offshore investment opportunity, they were shackled by the shortage of investment options.

"New developments were mainly speculative, and funded by the institutions, creating a false market dynamic.

"Institutions had to spend their cash allocations for property, and in most cases building new properties was easier than purchasing existing incomeproducing properties."

In the past four years the scene has changed dramatically.

Listed vehicles, each setting out to reach a critical mass of R1bn, have replaced institutions as corporate investors and could use innovative structured finance products to buy quality investment properties.

The decline of major central business districts has led to the development of quality decentralised office parks, with information technology facilities the norm in new properties.

Publisher: Business Day
Source: Business Day

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