Commercial property market to improve by 2010

"Against the backdrop of South Africa's resilient economy - despite the downturn, and with its varied areas of speciality ie industrial, retail and offices, the commercial property sector continues to experience movement. Perhaps the hype of next year's FIFA World Cup is carrying the momentum forward, but the fact is investors are still buying properties and premises and we have not seen the market become a noticeable 'buyers market' at all.

Rental vacancies

The crunch in the retail sector, which has seen many retail shops closing down and leaving gaping spaces in shopping centres, has had the knock-on effect of negatively impacting on the supply-chain business and of course the manufacturing sector. Commercial tenants have also tightened their belts and have held back either on their expansion plans or plans to relocate to perhaps upgraded premises. All this has seen vacancy factors rise, and somewhat dramatically in CBDs where figures have risen from 2% in boom times to sobering 12-15% levels.

"Yet commercial property rental rates certainly have not dropped significantly despite the state of the economy, and we are still seeing favourable rates in the Cape Town CBD and peripheries running at around R95-R140 per square metre for A-grade space. A number of office developments have recently been completed and, because of the tighter market conditions, we are seeing quite substantial areas of vacant space, which could have been taken up by large corporate tenants. As a result many landlords have been willing to enter into negotiations with distressed tenants rather than take more drastic action, realising that a paying tenant is a favourable asset."

Buyers want good yields

"Unfortunately many sellers are still under the misconception that unrealistic asking prices will be considered and need to understand that investors will not just purchase bricks and mortar in the hope of capital growth down the line. While two years ago, we were able to talk 8-9% yields, today shrewd investors will only start taking a serious interest in discussions at the 11% mark.

"With cash investors the most active in the current market, the recent interest rate reductions have seemingly had little impact on the commercial property market. As is the case with the residential market, until the financial institutions relax their lending criteria we will not see a flurry of borrowing activity, which would lead to more sales taking place.

“The general outlook for the industry seems to be a 6-8 month period of tighter trading conditions, but there are definitely some signs that the residential market is awakening. I predict that commercial property will ride out on the back of a recovering residential market - and by the middle of next year, we should see some recovery,” concludes Stroebel.