Risks and possible trends in the commercial office market - Jul 2002

Posted On Monday, 15 July 2002 10:01 Published by
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There are a number of economic, financial and business considerations impacting the market in general at present.

Risks and possible trends in the commercial office market:

There are a number of economic, financial and business considerations impacting the market in general at present.

  • At present, the biggest business risk remains one of oversupply. Naturally this continues to place pressure on rental rates and escalations, but provides attractive opportunities to the business community at large for negotiating attractive longer-term leases
  • The increase in interest rates by 300 basis points this year will certainly dampen any speculative developments and should slow down or quench planned project start-ups quite significantly. Furthermore the building Cost Index increased by 15.6% over the first 6 months of 2002 compared with the same period in 2001.
  • Gearing in both direct and listed property will be cautiously approached; this could be to the benefit of Property Unit Trusts’s, which appeal to more risk- averse investors. However many Property Loan Stocks have negotiated fixed interest debt instruments in place.
  • By the same token, investment activity has quietened down substantially, particularly by listed vehicles where the rise in yields has overtaken direct property capitalization rates. Medium term prospects for an encouraging listing environment are borne out by the low long-term bond yield forecasts and recent improvements through mid 2002. The appeal of the bond market will continue to compete against property.
  • In SA, the abolition of transaction taxes for mortgages transferred between institutions, will serve to improve the tradability of the property asset. Similarly, the abolition of transaction costs on the issue of listed debt instruments will enhance the trend towards securitisation of commercial and residential property; savings can be passed on through lower rentals.
  • The spike in target inflation is predicted to come down towards year-end; the jury is out whether this will automatically translate into interest rate cuts through 2003 – most predict at least a 100 bps cut. There are risks to this outlook, with the impact of the recent rapid depreciation of the Rand, fresh in every ones memory.
  • Tighter monetary conditions will however bring the commercial property market into greater demand/supply equilibrium; without too much impact on economic growth, we should see improvements (or at very worst a peaking) to the commercial vacancy rates by mid to end 2003.
  • There will however still remain a fairly substantial overhang of space in the market, which will continue to provide a competitive environment for business.
  • Down the line, following the take-up of the ‘best’ space in the decentralized nodes, CBD’s may well increase in popularity as full or partial business locations given improvements to their business operating environments as well as significantly lower rental rates. This should also drive some demand for greater proportions of CBD based property in portfolio assets
  • Quality stock will remain sought after by all investors and asset management funds may take advantage of the listed property values and acquire stock at below par value rates.
  • According to The Labour Force Survey, business services accounted for some 985 000 jobs in 2001 compared with 837 000 in 2000; this represents a growth of nearly 18%. Of the formal employment in the business services sector, an overwhelming number (88%) are employed in office space; 4.4% in home based facilities and 2.44% are mobile employees. In terms of employment by size of establishment; firms of 50+ employees employ 32% of the business service sector; 42.4% are employed in firms ranging in size between 2 and 49 employees and 9.5% of employed people work from one-person establishments. Space suppliers and managers may well seek to track such indicators in the pursuit of appropriate products
  • Local market risks naturally differ from locality to locality, but on the whole the major metropolitan areas are progressing under new democratic dispensations and business operating frameworks, all of which bodes well for the management of the public environment in general.
  • Increased export growth and business activity generated by NEPAD and other programmes could provide some stimulatory conditions for the growth of the services sector.

Publisher: Sapoa Online
Source: eProp Research

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