Commercial property - a key investment asset class

Posted On Friday, 18 July 2003 02:00 Published by
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Increasing recognition of commercial property as a key investment asset class continues as investors factor into their portfolio mix the volatility that has occurred globally in equities and bonds.

Increasing recognition of commercial property as a key investment asset class continues as investors factor into their portfolio mix the volatility that has occurred globally in equities and bonds.

Les Weil, executive chairman of JHI Real Estate, comments that heightened risk aversion is focusing investors towards sustainable and predictable earnings and South Africans are increasingly recognizing property as being an investment that offers steady income flow with wealth creation possibilities.

Direct property holdings tend to lack liquidity resulting in many investors being apprehensive about the inability to trade out of these investments when the need arises.   Not surprisingly, therefore, the focus of attention has been on the listed property sector where South Africa has been joining the worldwide trend to securitise property, mainly by listing on the JSE. This has resulted in a more than doubling of the market capitalization of the listed property sector from around R5 billion at the beginning of 1999 to over R18 billion currently.   The growth has come from conversion of institutional property into property unit trust and loan stock companies and also from private owner and developer sales into these vehicles.

“There is also a rational dichotomy developing” says Weil “between the yields applicable to listed property portfolios and those pertaining to individual properties.   Historically, a premium of 1% for marketability and 1% for spread and risk have been applicable and thus one could expect a 2% premium differential on yield in favour of listed property.“   The possibilities of a price in excess of net asset value will no doubt attract property owners to the listed sector and according to Weil about R10 billion of new property is in the pipeline.

He further adds that the decline in interest rates has immediately affected the asking prices of the larger A-grade properties, but it has not had much affect on properties of b- and C-grade.  This of course, evidences the differential in risk pertaining to the different classes, which is also well reflected in the different grades of property in the listed sector.

If economists’ forecasts of further declines in interests rates of between 3% and 5% prove correct, this can only be bullish for investment property values and will also reduce annual escalations and operating costs if lower inflationary conditions prevail.   “It is vital that increases in assessment rates and other municipal charges be brought down to conform with the inflation targets since these comprise the major proportion of operating costs,” says Weil.

Unlike residential property, commercial property is generally priced at a discount to replacement cost. Weil believes that the gap will progressively narrow, subject to the adaptability of existing property to be upgraded to suit the occupiers’ requirements.   Given the outlook and greater focus on commercial property, Weil is extremely positive and optimistic about the next 2 to 3 years.

Ends

Issued by:

Rosemary Roberts

JHI Real Estate Ltd

Tel: (011) 441-0339    Fax no.: (011) 441-0172

This email address is being protected from spambots. You need JavaScript enabled to view it.

June 2003
Publisher: JHI Real Estate
Source: JHI Real Estate

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