STELLENBOSCH Market fundamentals indicate that the SA residential property cycle is at or near its peak, while the nonresidential sector is about to take off, says the Bureau for Economic Research .

The bureau's senior economist, Charles Martin, said yesterday at the annual Rode property conference in Stellenbosch that the consensus forecast from a range of economists was that residential property prices would increase by 7,8% in real terms this year and 4,9% next year, from 11,7% last year.

This compared with a 2% real decrease in nonresidential property prices last year, an expected 2,2% increase this year and a forecasted 5,7% real gain next year.

"We can see this upswing carrying on long into 2006," he said. "There is no real pressure on the fundamentals of the economy to indicate why it should end."

Property research doyen and CEO of Rode & Associates, Erwin Rode, shared Martin's outlook: "I would not invest in residential right now, but I would go hell-for-leather for industrial property.

"The nonresidential property market is the only asset class in SA that is not fully priced at the moment. Hold onto your hats there is a boom coming in the industrial property sector," he said.

Rode said while house prices at the upper end of the market were significantly above replacement costs usually an indicator that the cycle had peaked the residential and nonresidential markets had been "out of sync" for several years.

Industrial property rentals had never been lower, especially in the central Witwatersrand region, and vacancies had dropped sharply during the last quarter. This usually indicated that the market was in the early stages of a boom period.

Martin said the latest research from the bureau, not yet officially released, showed that building contractors' confidence in the future was rising steadily, with increasingly upbeat sentiment being expressed about the prospects of the nonresidential sector.

However, between 85% and 90% of contractors were already complaining of skills shortages, which implied building costs would continue to rise. The bureau expected costs in this sector to rise 6,5% in real terms this year and 10,9% next year, from 9,2% last year.

Banking group Absa, which focuses more on the residential side, has released a cost increase estimate of 14,2% for this year and 11,6% for next year. This compares with a cost increase of 19,9% last year, indicating that the housing market is running out of steam.

"We are not yet at the stage of irrational exuberance (in the residential market) but investors should remember that there will eventually be a downturn. The problems could come if there is an external shock to the economy that causes interest rates to rise again," said Martin.

However, First National Bank chief economist Cees Bruggemans told delegates SA's ability to withstand external shocks had improved and the country's economic prospects were encouraging.

He said there was every chance that inflation would remain in the lower half of the Reserve Bank's target range for the foreseeable future, and that another 50 basis point cut in interest rates was on the cards.

"At some point the current growth in the consumer and construction sectors must trigger investment decisions ... these factors indicate we are only at the beginning of the economic expansion."