Despite steady economic growth, property returns in South Africa last
year fell to 9,5% from 10,6% in 2001, according to figures just
released by the South African Property Index (Sapix) and Investment
Property Databank(IPD).
In real terms, allowing for last year's acceleration in inflation,
total returns weakened to 0,6%, from 4,6% in the previous year.
Capital values declined marginally at all property levels in 2002 for
the first time since 1998. Total returns were further clipped by a
small decline in the rate of income return, from 10,5% in 2001, to
9,9% last year, reflecting an increase in vacancies. By the end of
2002, 12,8% of total floorspace was vacant, against 12,1% at the end
of 2001.
Retail was once again the best performing mainstream property sector
in South Africa in 2002, although total returns of 11,0% were 2,5
percentage points lower than in 2001. Capital values rose by 1,8% and
the vacancy rate held steady at 6,3% of total floorspace.
Office total returns dropped to 5,1% in 2002, almost half their
long-term average. Capital values fell by 5,0% and the rate of income
return dipped by 0,8 percentage points to 10,1%. The performance of
offices was undermined by an increase in the vacancy rate, which rose
to 23,7% of total floorspace from 18,8% at the end of 2001.
While retail and office returns weakened last year, industrials saw a
perceptible improvement, aided by a fall in the vacancy rate.
Although capital values fell for a fifth year in a row, the decline
was smaller than in recent years, and total returns of 8,8% were
above the office market returns for the first time since 1998.
Total returns in the other property sector were 20,5% in 2002. The
category includes hotels, which gained from a general growth in
tourism,
including the extra business associated with the Earth Summit held in
late August and early September.
Further analysis of the major retail segments reveals that Gauteng
regional shopping centres saw the highest returns, at 13,6%, thanks
to improving capital growth and a vacancy rate of just 2,3%.
At the other extreme, CBD office capital values fell by
8% to 9% as vacancies soared to 40% of total floorspace in Gauteng
CBD and 25% in other CBDs. Provincial offices, however, saw returns
improve to 13,8%, thanks to accelerating capital growth and a slight
fall in vacancy rates.
Over the full eight years of the Sapix/IPD record, retails have been
the best performing sector with annualised returns of 14,8% per year.
Retail is the only sector where capital values have risen over the
medium-term and the one market where the vacancy rate has remained
relatively low at 5% to 6% of total floorspace.
Office and industrial total returns have averaged 9,2% and 10,1% per
year, respectively, since 1994. While initial yields have been set
higher than in the retail sector, the difference in income return has
been insufficient to compensate for the medium-term decline in
capital values.
The South African results are the fifth set of results to be
published by IPD in 2003, after the UK, Swedish, Irish and Dutch
results. Comparatively, the South African results are very positive.
Only the UK has slightly higher total returns, by 0,2 of a percentage
point, with the Irish and Swedish being vastly lower at 2,2% and 2,0%
respectively.
IPD is now in its seventh year of reporting on the South African market.
The project has been co-ordinated by Sapix, which was created in 1997
to develop with IPD an authoritative databank on property investment
performance in South Africa.
IPD South Africa, an independent operating subsidiary of IPD UK, was
established in October 2002 to provide property data to the local
market.
The databank compiles information on 17 portfolios (including those
of the three largest investors in the South African market) covering
nearly 2 000 properties with
a total market value of
R46,7-billion.
Each property was measured using a common approach to valuation to
arrive at the series of indices comprising the overall 2002 Sapix/IPD
South African Property Index.
MELROSE ESTATE MINI OFFICE DEVELOPMENT
A new Abro Luntz "mini-office development" in Melrose Estate has all
the elements necessary for this new market segment, inclusive of
naming rights, easy access, prestige and individuality. It
incorporates differentiating design features with lofted ceilings,
organic finishes and is open planned. The developers believe it
should appeal to professional service providers. Units are now
available for rental, with occupation in the last quarter of this
year.
CAPITALISATION
One of the ways in which a property value is derived is to capitalise
the net income derived during the first year of ownership. The basis
for this method of valuation is demanding a certain level of return
("yield") on the money invested in the property.
Let us assume that your required yield is 14%. The second step would
be to calculate the net income of the proposed property investment.
If this equates to R100 000, the value that you would be prepared to
pay for the property would be R100 000 divided by 14% = R714 286.
When the return rate is used in the context of income capitalisation,
it is referred to as a capitalisation rate.
There are two traditional methods of determining the appropriate
capitalisation rate.
The first is to extract the rate from the market by comparing similar
properties to the subject property and selecting the return at which
a property closest to the subject property was sold. The selected
return is then used as a capitalisation rate. The second method is by
deriving the return required by the financier; and return required by
the equity investor before tax, and adding these values together.
The return rate re-quired by the financier is calculated as follows:
Loan to value ratio X effective interest rate = mortgage constant.
The return rate required by the equity investor before tax is derived
is: The equity to value ratio X the equity return before tax = equity
dividend ratio.
Once each of the two values has been derived, the values are added
together to derive the optimal capitalisation rate of the property.
nInformation provided by Jonathan Smith, director of Courtwell
Consulting. He can be contacted on 011-888-
5978 or via e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it.
CORPORATE ACCOMMODATION MANAGEMENT
Large organisations are making much use of what RMB Properties calls
Corporate Accommodation Management (Cam) to proactively minimise
property expenses and enhance efficiencies.
RMB director Hugh Basel says Cam focuses on minimising
proper-ty-related expenses and extracting value for the corporate
end-user, as opposed to asset management, which focuses on maximising
returns on property owners' portfolios.
"As few corporate users employ internal property specialists,
property portfolios are managed by finance departments that don't
have the expertise or time to contain lease expenses and marry the
relevant business case to the property strategy," says Basel.
Publisher: The Star
Source: The Star
Despite steady economic growth, property returns in South Africa last year fell to 9,5% from 10,6% in 2001, according to figures just released by the South African Property Index (Sapix) and Investment Property Databank(IPD).
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