Strong performances in retail and industrial property grabbed the attention of investors in 2004, says JHI chairman Les Weil. But, he predicts, it is the office sector that is poised to move in 2005.

After years of lying fallow in the wake of over-supply, static office rentals are firming and there will be a reduction in landlord concessions. “Property managers are reducing rent-free periods and tenant allowances at office buildings,” explains Weil.

The market’s resistance to speculative office development will also start to shift and Weil argues that the timing may well be positive for new projects to get off the ground.

But other sectors are also looking good for 2005.

Shopping space continues to be in high demand, with vacancies in JHI’s retail portfolio dropping from 4% to 1.3% over the past 12 months.

Industrial property has led the commercial revival this year with rental increases of between 25% and 30%, according to JHI research. Old space can still be leased at gross rentals ranging from R10/m²- R15/m². New space is coming on-stream at twice those rentals.

JHI advises commercial and industrial tenants who need new space, or whose leases are expiring next year, to secure new premises as soon as possible. “Rentals are likely to rise as the year progresses,” adds Weil.

Having regard to power outages, especially in Johannesburg, Weil recommends tenants to check electrical capacity in nodes where they wish to locate. They also need to be aware that municipal rates will increase once the new municipal rating system is implemented.

Weil notes that private investors are increasingly migrating from residential property into the office and industrial sectors. He underlines the complexity of commercial and industrial property, however, and points to the need for experienced and expert commercial property advice.

“Ensure you’ve been well-advised about appropriate property design, air-conditioning capacity, parking ratios, the re-lettability of the building, and maintenance costs before you buy commercial properties,” he elaborates.

After several years of keeping a low profile, institutions are once again set for re-investment - and even develop - in the commercial and industrial property sectors.

“In fact, 2005 should prove to be a golden year for investors across the real estate marketplace,” says Weil.

Escalating building costs are signalling improved builders’ margins and a shortage of building materials. State infrastructure programmes, the R40bn to be spent on housing via the Financial Services Charter, and an expanding construction market are likely to drive building costs upwards for the next few years.

This should make it more attractive to buy than to rent commercial properties, says Weil.

“Progressive increases in development costs underpin upward pressure on rentals for existing properties. Potential owner-occupiers of buildings should purchase or develop their own properties as a high priority,” suggests Weil.

Above all, cautions Weil, investors must exercise vigilance and carefully investigate potential property acquisitions or leases.

Rising rentals and firmer demand are good for both direct and indirect property investors. Weil anticipates that the listed property sector could achieve total returns (earnings + capital growth) of 15% in 2005.

“There is less than 50 basis points difference between property unit trust (PUTs) yields and long-bond yields right now. Historically, this would signal that listed property is getting expensive,” explains Weil.

Strong net rental escalations and positive sentiment globally is boosting property investment, as buyers realise the advantages of low volatility and annuity income in the sector.

JHI forecasts further listings of property in 2005 – in PUTs, property loan-stocks (PLSs), and Fund of Fund structures.

Listed property companies remain acquisitive, buying up new stock and even turning their hands to development projects.

“Competition for investment properties from private investors is also increasing.  The result, says Weil is that yields have reduced by around 300 basis points,” and listed funds buying at these yields could experience some initial earnings dilution.”

Private investors, are usually more nimble when it comes to investment decision-making, and are increasingly prepared to pay a premium over the price offered by listed and institutional buyers, in order to secure a long-term investment purchase.

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