“In a country blessed with an abundance of space, it is a seeming anomaly that developable land be regarded as a scarce resource,” says Les Weil, executive chairman of JHI Real Estate. Increasingly all segments of the property market are competing simultaneously for location and this is compounded by the delays in procuring economically viable greenfield land, compelling the property sector to take a long hard look at where and how things are currently being done.

“Land holders – be these holders of unproclaimed, vacant or under-developed land parcels, and particularly zoned land – clearly have a valuable asset at their disposal and need to think carefully, creatively and strategically how best to maximize opportunities. Whilst at the same time such land owners need to be cognizant of the socio-economic and environmental impacts of development,” comments Weil. In Johannesburg for example, the bulk rate of office land can range from R700/m² to R2700/m² depending on location. More often than not this +250% difference in land price will still favour the pricier market even though the market rental difference is only about 100%, implying that locational considerations remain crucial. “Given strong market demand, reducing vacancies and the required cash flows to make new leasehold developments feasible, should almost certainly push prime rentals to new highs – particularly for office and industrial space.”

The veritable feeding frenzy that has transpired around property acquisition is of course a fairly important consideration. Weil emphasizes that it is all very well acquiring an asset, but if this has transpired through paying a premium and additional capital investment is still required, then the potential repercussions must be seriously considered. Any transaction must ultimately take a view on the outlook around rental growth/inflation and demand, as well as strict application of basic property fundamentals – these include factors such as the state of the property, the opportunity for refurbishment and the cost thereof, locational factors - and the extent of financial risk transpiring from anticipated and unanticipated shifts in monetary policy.

New developers and investors to the market, foreign investors, sectional title owners and those previously exposed to the residential market, may all be relatively inexperienced when it comes to commercial property and Weil strongly recommends that they obtain advice from established practitioners and property service providers, when seeking and evaluating investments.

One of the increasingly critical factors impacting the sector has been inflation - particularly the disparity between building and related operating costs and what is recorded by way of the official inflation target. Clearly the industry has to look at this aspect, however, consider this – if one takes the average between building cost inflation (15%) and CPIX (4%) you get a rate of around 9% which is exactly where rental escalations are currently pitched. One might thus conclude that this is a fair compromise between broader inflation expectations, actual real costs of replacement and required investment returns. In addition to rental escalations when evaluating base structures, due consideration must be given to the length of leases, turnover clauses in retail premises and operating cost escalations.

“Looking ahead, the acute shortage of investment grade stock will further contribute to the downward pressure on yields.” It can also be expected that the scarcity of skilled labour for the development and construction sectors coupled with the drive for massive state infrastructure expenditure, is surely set to keep building cost inflation at current or even higher levels, with commensurate impacts on asset pricing and rentals.

“On this score growth in the listed sector will remain driven predominantly by earnings growth. Shortage of scrip coupled with a strong demand implies that newly listed funds are generally enjoying a positive re-rating soon after listing, but at the end of the day, fundamentals need to be considered and normal property valuation considerations must prevail,” concludes Weil.

ENDS
Issued by Rosemary Roberts of JHI Real Estate Ltd
Tel: 082 776 9555 or 011 441-0339
November 2005