Commercial real estate down but not out

Figures issued by the South African Property Owners Association-IPD SA property index last week showed that direct property had underperformed equities and listed property but outperformed the bond market last year.

Looking up

Over three years, direct property outperformed all other major asset classes.

Long-term property returns were still in double digits, with three- and five-year annualised total returns at 16.2% and 21.0%, respectively.

Over the full 15-year history of the index, annualised total returns now stand at 15.9%. Figures showed that SA's high domestic annual inflation, relative to most mature global investment markets, at 6.3%, was such that the nominal total return for last year was substantially eroded to 2.3%.

There was 30 basis points of capital growth, the lowest since 2002, and a resilient 8.4% income return.

Peaks and valleys

“While nominal returns were strongly in the black, the figure marks the second consecutive year of performance decline in South African property markets following the boom years between 2004 and 2007, which peaked in 2005 at 29.8%,” IPD SA MD Stan Garrun said.

Garrun said that — given the state of the domestic economy and the relationship between the national real estate market and the wider global downturn — the real inflation-adjusted total return was still “remarkably” resilient.

SA's performance was underpinned by strong net income growth at 9.4%, and very stable income returns of 8.4%, the latter only eight basis points down from 2008.

The strongest capital growth came from the retail sector, at 0.9%, while at the other end of the spectrum offices declined the most by 1.2% and industrial property slid 0.6%.

Income returns for retail, offices and industrial were 7.8%, 9.2% and 9.2%, respectively.

All property yields moved out by 25 basis points over the past year to 8.1%.

SA had the highest nominal return of the 11 countries for which the IPD had released results to date.

Negative territory

Virtually all commercial real estate markets measured by IPD fell into negative territory over the past two years, including the US, Canada, Australia, New Zealand and Japan.

The UK market, which was the first to decline, appeared to be in recovery after a 3.5% return was delivered last year, a considerable turnaround from the negative 22.1% in 2008.

By comparison, the US, the world's largest commercial real estate market, suffered a steeper negative return last year, at -17.5%, compared with 2008's -7.3%.

Last year's annual returns published so far for the rest of Europe had been broadly positive. The notable exceptions were Ireland (-23.3%) and the Netherlands (-0.2%). Denmark returned 3.9%, Finland 3.8% and Sweden 1.4%.

Other returns were Canada -0.3%, Australia -2.2% and New Zealand -4.1% — all of them worse than in 2008.

Source: Business Day