PERHAPS the two most important risks facing the property sector, both listed and unlisted, this year are an inflationary environment and poor co-ordination of vacancy marketing by property managers.

This is the view of Jonathan Smith, a director of property strategists Courtwell Consulting, who delivered a presentation on property-sector risks to property representatives at a business breakfast in Sandton recently.

Smith says there is evidence to suggest that "we are going to be operating in an inflationary environment in the next 12 months" with pressure on the trading volumes of all tenants of commercial property owners and a downward pressure on rentals.

"The risk is if property owners do not carefully analyse which of their tenants are more susceptible to inflationary pressures they could end up losing tenants because they are unable to negotiate renewals," Smith says.

The first evidence to suggest an inflationary environment in SA is that total private expenditure is increasing faster than growth in gross domestic product (GDP). While production is fairly low, demand is fairly high, which creates an inflationary environment.

A second reason to suggest an increase in inflation is that three major sectors are going to show price increases. This includes food because of drought, vehicle running costs driven up by higher fuel prices, and the cost of housing. Smith says sharp increases in credit demand will also push up inflation.

However, Smith says it is possible for property owners to identify which of their tenants are facing trading pressure and anticipate potential loss from that. "With default risk you must ensure that your credit management is exemplary."

Smith says there is still a high risk of property managers not managing their vacancy levels in their portfolios and "not getting their renewal profiles right".

"The problem is that there's been a slight reduction in vacancies across SA.

We had an oversupply of space, but take-up is increasing slightly. A number of property managers are complacent, and the risk is if they are complacent about their marketing strategies then the owners will suffer because their properties won't get let first.

"If you don't get your renewal profiles right you are always going to be negotiating on the back foot."

Smith says property managers can implement marketing strategies to improve vacancy levels and lower this risk.

Mar 17 2004 07:36:07:000AM Nick Wilson Business Day 1st Edition