Property remains stagnant but commercial sector offers pockets of growth

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The local property market is not independent of the overall economy and how it performs. Rising inflation, a weak currency, doubts over the stewardship of the economy and the threat of a downgrade, among other factors, means that property values remain low for those who have it, and unaffordable for those who want to acquire it.

However, a closer look at the different sub-sectors of the property market reveals a more nuanced picture which is far from uniformly sombre. The worst performer is the residential property sector, which has delivered low or negative real returns since 2007. But commercial and industrial properties have managed to hold their own, even showing pockets of exceptional growth.

Market size estimation

A recently released market size estimation by the Property Sector Charter Council, reveals that for the 2014/15 fiscal year, commercial property carried a value of around R1,3trn, up from some R780bn. Of this, almost R790bn is held by corporates, R300bn by real estate investment trusts (REITs), R130bn by unlisted funds, and R50bn by life and pension funds.

Retail property has the highest value at R534bn (R340bn in 2012) followed by office properties at R357bn and industrial properties at R281bn. Hotels and other property accounted for R94bn in value. The report shows that the overall size of the South African property market sits at R5,3trn, up from a reported R4,9trn in 2010.

The relative strength of commercial and industrial properties is not because retail and manufacturing are booming, but rather because returns on other asset classes are so trivial that investors are chasing whatever value they can get. The flipside of this dynamic is that the owners of commercial and industrial properties are holding onto their assets and, as a result, even though shop and factory buildings are growing in value, there are very few of them on the market.

This by no means heralds a return to the shopping-centre craze that drove an explosion of retail space before the financial crisis. Commercial developments follow economic and population growth. For now, we can expect a levelling off of the growth of retail space.

Student accommodation shows strong growth

An interesting property sector that almost certainly will show strong growth in the foreseeable future is student accommodation. Figures show that South Africa has 550,000 students who need accommodation, and the state, in the form of the universities and colleges, can only provide rooms for about 100,000 of them. The rest will have to be provided by flats, spare rooms and of course property developers taking up this opportunity.”

For those considering property investment, affordability is the main consideration. Installments are generally higher than rentals, at least in the first five years, a reality which poses a cash-flow challenge for a business that decides to become its own landlord.

Rentals, however, are subject to annual escalations, so in later years mortgage installments will become more affordable than the rentals the business would have paid, but only if the rise of interest rates is contained.

Individual investors should therefore not expect immediate returns on their investment in a property. For now, long-term capital growth should be the goal, as well as any strategic consideration, such as securing the position of a business by buying the building from which it operates.