Good Commercial for Property

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Figures released on April 3 by the UK-based Investment Property Databank (IPD), showed that the overall returns from the South African commercial property market, which combine an increase in capital value and income, came in at 26.7% in 2006, a result that has been bettered only once in the past 12 years, with 30.1% in 2005.



For the second year in a row, property in South Africa's industrial sector posted the best results, with returns of 31.1%. Though down on the 2005 figure of 32.6%, retail property gave a more than solid 27.4% return while the office sector came last with a total return of 24.5%.



One reason given for the edge being taken off the 2005 results was the hike in interest rates last year and a rise in long-term bond yields.



A contributor to the strong results was the low vacancy levels across the board, which fell again in 2006 to just 4.2% of total commercial property stock, the lowest figure for the past decade.



By contrast, investors in the residential property market saw home prices rise at a year-on-year rate of 8.4% as of the end of March, according to April 3 figures released by Standard Bank of South Africa. The result was well down on the 40% increases seen in 2004.



This more moderate rise in housing prices could be a reflection of the high levels of household debt to income, which hit 73.8% at the end of 2006 and interest rates of 12.5%, which may have taken some of the heat out of the market. Though residential property prices are not expected to drop any time soon, neither are they likely to return to the heady days of a few years ago.



According to Stan Garrun, IPD South Africa's managing director, 2006 was another year of strong performance for the South African commercial property sector. "It is the second best achieved historically and all indications are that it will rank in the top performers internationally as well," he said.



The 2006 results put South Africa very much at the top of the list as far as international commercial property results are concerned. Out of nine countries for which IPD has so far published results, South Africa is second only to Ireland, which showed returns of 27.2%. A long way further back came Canada with 18.6%, the UK at 18.1% and Denmark with 17.8%. While Norway recorded returns of 17.6%, none of the other three countries so far listed on the index - Sweden, the Netherlands and Portugal - were within 10% of South Africa's performance.



Simon Fairchild, IPD's UK director, said the strong results would attract more overseas investment into the commercial property sector in South Africa.



"I do expect more foreign property investors to start entering the South African property market," Fairchild told the local press on April 4. "I think they will be opportunistic investors to start with. They may later become core long-term investors looking for diversification benefits."



Though the outcome for offices was less than had been projected, industry insiders expect this segment to take off shortly as demand increases and the economy continues to expand.



"Offices were possibly expected to perform relatively better, but are well grounded for future growth," said Garrun. "Continuing demand, confidence and strong property fundamentals are confirmed in the IPD figures."



Another to back the longer-term potential of office properties was John Loos, a strategist at First National Bank. "I still believe that it is a matter of time before the office sector takes over from the industrial sector as the top performer," he said.

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