Continued buoyancy with demand far outstripping supply and a shortage of industrial land, will remain the scenario for the commercial property market in Kwa-Zulu Natal into the New Year.
 
This is the view of Rob Moran, JHI Real Estate regional director. “We are not seeing any slow down in demand for investment property and this is proving particularly positive for the Durban Inner City,” he says. “We are, in fact, likely to see even more private investment interest following the government’s relaxation of restrictions to its tax incentives for inner-city rehabilitation.”

To date only developers who keep their properties as investments can claim rebates of between 25% and 40%. The new legislation currently before parliament will remove these restrictions and allow developers who sell, and their buyers, to claim rebates.

Strong demand has seen yields continue to drop, but good quality low risk opportunities remain scarce, says Moran.

The dramatic shortage of industrial land is a scenario mirrored nationally and is unlikely to change in the medium term. “We anticipate that this will continue to place upward pressure on prices. Industrial landlords have certainly seen vacancy levels reduce significantly with an attendant escalation in rentals.”

Developers remain squeezed by high building costs. Research analysis conducted by JHI highlights inflation as a critical factor impacting this sector, particularly the disparity between building and related operating costs and what is recorded by way of the official inflation target.  However the research considers that 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. The research concludes that this is surely a fair compromise between broader inflation expectations, actual real cost of replacement and required investment returns.

None-the-less, Moran highlights the dramatic impact that building costs, together with increased land values, are having on asking rentals in new developments. “This is a particularly challenging for developers and users alike”.

Looking ahead, the shortage of skilled labour for the development and construction sector coupled with the drive for massive state infrastructure expenditure is destined to keep building cost inflation at current or even higher levels, with commensurate impacts on asset pricing and rentals.

“We, therefore, do not see any dramatic shift in this scenario in 2006 and anticipate much of the same going forward over the next 12 months,” says Moran. “Similarly, we do not anticipate that interest rate hikes, at the levels currently anticipated by economists, will have any significant impact on the commercial property market.”