Commercial property outlook positive

Posted On Thursday, 03 February 2005 02:00 Published by
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Residential property is booming and mortgages are being advanced by the banks at record levels.

Presenter: Lindsay Williams Guest(s): François Viruly

Residential property is booming and mortgages are being advanced by the banks at record levels. What’s happening in the commercial sector of the property market? Lindsay Williams gets François Viruly, property economist, on the line

LINDSAY WILLIAMS: Is the same sort of thing happening in commercial property? When we see the amount of money being lent by the banks for the residential market - are companies saying: "With interest rates so low, we should actually be putting up our own buildings rather than renting"?

FRANÇOIS VIRULY: I think there’s a lot of that starting to happen in corporate South Africa. What is quite interesting is that the whole issue of corporate real estate has actually been fairly low on the agenda in the boardrooms of South Africa. But certainly, when you start seeing the interest rates declining, you suddenly pick up that interest. I think what has also happened is that people have been burned in the past - there are corporates who made those exact decisions and found themselves with interest rates at 25.5% and said: "Bad decision!" But I think the market is changing in certain respects, and I think that’s what is interesting at the moment - we are seeing high levels of activity in the sectional title market. In other words - instead of buying a whole building, you’re buying a section of it. That is happening both in the industrial property market, as well as in the office market. We’re seeing good examples of that in Sandton, and in Rosebank.

LINDSAY WILLIAMS: Has that ever happened before, in your experience, in South Africa?

FRANÇOIS VIRULY: It has happened, but it never really took off. There have been a number of marketing initiatives in that respect - I think that things are changing in that respect, and I think it has to do, primarily, with the low interest rates that we’re seeing at the moment. To be honest, people are starting to see value in property. It is possibly people who entered the residential property market, and saw the opportunities there, and who are now saying: "Maybe there’s something in the commercial property market, as well."

LINDSAY WILLIAMS: What happens with the company that outgrows its office - and then has to pass it on. Is it a marketable opportunity for them, if they want to then sell the office, and upgrade?

FRANÇOIS VIRULY: I think that’s an interesting point. The debate is as follows - you can rent, but often you sit there with maybe five year leases, ten year leases - which you actually can’t get out of, or which are very expensive to get out of. The question that often arises - is it easier to sell a building than to get out of a lease? That is, of course, the debate that happens. The other issue, of course - there is always the potential for capital growth, with buying properties. So the flexibility debate doesn’t always wash, from a leasing perspective.

LINDSAY WILLIAMS: What sort of implications does this have for the listed property market on the JSE?

FRANÇOIS VIRULY: It all depends what sector you go for. My own view in that respect is that 2004, and the year before, were very good from an industrial perspective. So if you look at funds such as Marprop - and others who are heavily in that market, Metboard for example - you would have done very well in the industrial property market. I think it is time, possibly, to look at the retail market. On Classic Business Day we’ve had a lot of analysis of the retail market - we’ve seen stores looking very carefully at what they’re doing, where they’re situated - and I think that the retail sector will do well. But if you are really going for capital growth, I would say have a good look at the office sector at the moment.

LINDSAY WILLIAMS: Any particular geographical areas within South Africa that are particularly buoyant development nodes at the moment?

FRANÇOIS VIRULY: I would say look at the Durban market. The Durban market slightly trails the Cape Town and Johannesburg markets. I think the structure of the markets has also changed. In the past we had a few large institutional investors in this market - we now have small players, small developers in that market - who are ready to do a deal. So look at those markets, and I think look at the sectional title market.


Publisher: Business Day
Source: Business Day

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