By Joan Muller

Senior writer

ROWING concern that overheated housing markets worldwide are heading for a crash-landing is apparently creating a positive spin-off for commercial property markets. A report released last week by the British-based Royal Institution of Chartered Surveyors (RICS) on international commercial property trends shows that last year investor demand for commercial property increased strongly in most global centres, particularly in industrialised countries.

The report shows that the surge in investor interest in commercial property has been fuelled not only by historically low interest rates and a migration of capital from poorly performing stock markets but also by growing perceptions that residential property prices have risen too far, too fast.

It appears from the RICS report that central banks in a number of countries – particularly in Asia and Australasia – are tightening monetary policy in an effort to cool overheated housing markets. That’s encouraging private investors to turn from residential to commercial property, particularly now that signs of a global turnaround in the commercial property sector are emerging.

Though the RICS report doesn’t include information on Africa’s property market, analysts in SA agree that trend is also evident here. Property economist Erwin Rode expects investor focus to shift increasingly from the residential to the commercial sector. He says that while it seems that residential markets have already peaked, SA’s non-residential market is just starting its recovery.

Rode expects growing investor interest in the listed property sector in particular, as improved fundamentals – such as lower vacancies and higher rentals – start feeding through to stronger earnings and share price appreciation.

James Templeton, spokesman for the Association of Property Unit Trusts, agrees. He says that listed property currently offers SA investors a far more attractive entry into property than the residential buy-to-let market. There’s no hassle factor with tenants, income yields are substantially higher and the fundamentals are improving.

Says Templeton: "As residential property prices are reaching a new zenith, so the actual yield on the properties is falling. On average, residential property currently offers an income return on capital of only 5%/year.

"That equals an after-tax return on a money market account and comes nowhere close to meeting home-loan financing costs of around 9,5%. On the other hand, listed property is offering an average forward yield of 10%, with an expected 5,7% increase in distributions over the next year."

Analysts say that positive sentiment has also sparked demand for directly-held investment properties among both private and institutional investors in SA, enabling sellers to achieve premium prices for their buildings on the back of falling yields.

The RICS report shows a similar surge in demand for investment properties is evident in North America, developed Asia, emerging Europe and some Western European centres, such as London, Paris and Barcelona, where yields or capitalisation rates are falling markedly as capital values rise.

The report states that where Asia is concerned, a turnaround in real estate activity is particularly noticeable in Japan, which last year witnessed the first significant increase in employment in seven years. Office vacancies in central Tokyo fell to about 4% last year, while rentals were up 10%.

A growing appetite for commercial property is also evident in Hong Kong.

The latest office rental survey by international real estate group CB Richard Ellis confirms that commercial property markets worldwide are now in a steady recovery phase. Their figures show that strong office rental growth was recorded in a number of cities last year, particularly in the Asian Pacific region.

Hong Kong recorded the highest rental growth (in local currency terms) of all cities surveyed in the report, with growth of 54% in 2004.