Renewed interest for commercial property?

Posted On Thursday, 04 September 2003 02:00 Published by
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The recent second-round announcement of a cut to the prime interest rate confirms commercial property’s season of lower direct capitalization rates and listed yields.

The recent second-round announcement of a cut to the prime interest rate confirms commercial property’s season of lower direct capitalization rates and listed yields.

Most commentators would furthermore agree that we are some way from the bottom of this lower interest rate cycle. Many expect the prime rate to be around the 12.5% mark by year end with the possibility for even lower rates into 2004 – with some even going as far as to suggest that we will touch the sacred ground of a single digit prime rate before heading up higher into 2005. All in all, this makes debt cheaper to service and results in positively geared scenarios; making the growth of debt vehicles such as Property Loan Stocks that much more compelling. Where not already done, Property Unit Trust’s will also be encouraged to take advantage of the permitted 30% maximum gearing. Naturally a careful eye will need to be kept on forward positions, which players will derive from the yield curve.

How will the commercial property market be impacted? According to Jay Junkoon, director: Africa for JHI Real Estate, a modicum of equilibrium is coming through on the office front, but certainly in the most important markets – Johannesburg and Cape Town in particular - some fundamental improvements to take-up will be required and it will be some time before speculative developments should be entertained.

“However good quality office and well-tenanted office assets are still attracting the interest of property funds and their vendor agents, who are seeking to grow their market capitalization positions. In fact competition for quality stock is itself driving down yields and though some listed property funds are trading at even lower comparable yields - making the direct/listed conversion factor that much more appealing - this differential is being slowly eroded due to the competition.”

Junkoon adds that lower interest rates tend to drive down listed yields quicker than they do directly held property and on balance, the race for rapidly growing funds will remain feasible and an important dynamic of the commercial property terrain into the medium- term.

With cheaper cost of capital, one will expect businesses to begin an expansion phase – this in turn could translate into demand for more space thus serving to reduce the high vacancies in many prime markets around the country.

 “Similarly, we expect business trading out of industrial and retail premises to be boosted. Retail markets in particular should be fueled by positive consumer sentiment. The Industrial export markets have taken a beating from the stronger rand, but those products and processes that seek to beneficiate will no doubt see their import component costs come down, thus potentially assisting demand for hi-tech and related industrial space.”

Issued by Rosemary Roberts of 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.
28 August 2003

Publisher: JHI Real Estate
Source: Rosemary Roberts

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