SA is third best commercial property market

A property investors can still make more money in their own back yards than in most other parts of the world. That’s true for directly held retail, office and industrial buildings as well as JSElisted property funds.

SA’s directly held commercial property market has delivered an average 11,4% total return for the 12 months to the end of June, according to Investment Property Databank (IPD).

SA is the third-best performing commercial real estate market after Canada (14,9%) and the US (11,9%). IPD tracks the investment performance of commercial real estate portfolios in 30 countries.

Though the US and Canada may well have pipped SA to the post over 12 months, both countries came off a low base following the slump in global real estate markets in 2008/2009. Returns in both the US and Canada have weakened in recent months. That’s unlike SA’s commercial property market, which has shown a strengthening trend.

According to the Sapoa/IPD SA Biannual Property Indicator, SA’s total return for the first half of 2012 is 5,9%. That’s ahead of the 3,9% and 5,1% achieved for the first and second halves of 2011.

“There’s very little happening in global commercial property markets and growth is slowing down in most parts of the world. But SA is bucking the trend somewhat,’’ says IPD SA MD Stan Garrun.

He says though SA commercial property is by no means heading for the super returns of 25%-plus seen during the boom years of 2004-2007, SA is nevertheless holding up well considering the fragile state of the global economy.

He believes SA property returns have been buoyed by local property owners aggressively exploring new growth markets, most notably shopping centre developments in townships and rural areas as well as in the rest of Africa.

“The relative health of our market is a testament to the sharp management skills of SA asset managers.’’

But Garrun warns that despite slightly improved returns so far this year, investors shouldn’t expect a liftoff. “We are unlikely to see returns increase much further until there’s a noticeable improvement in the overall economy.’’

Though the general perception is that the office market has struggled the most in recent years, IPD figures show little differentiation between the returns achieved by the three sectors of the SA commercial property market for the first half of 2012: industrial buildings lead at 6,3%, followed by retail at 6,1% and offices lagging only slightly at 5,8%.

Investors who have indirect exposure to SA commercial property through JSElisted property stocks have had a particularly lucrative year so far. The sharp rally in share prices since January has placed SA as the best performing listed real estate market for the year to date, both in US dollar and rand terms.

According to Cape-based Catalyst Fund Managers, SA’s R207bn listed property sector achieved a total return of 37% in rand and 31% in dollars from January to the end of August. That compares to 23% (rand) and 18% (dollar) achieved by global listed property, as measured by the UBS global real estate investors index.

Analysts say demand for SA listed property stocks has been driven largely by an ongoing search for income. Though yields have come down as share prices have gone up, the sector still offers investors a forward yield of a healthy 7%. That compares to an average forward yield for global listed property of 5,15%, according to Catalyst fund manager Jamie Boyes

Recent research commissioned by the Property Sector Charter Council places the total value of SA’s commercial property market at a substantial R780bn. The bulk of that (R600bn) is business premises owned by corporates. SA’s listed property funds collectively own another R120bn worth of commercial buildings while the remaining R180bn belongs to life assurers, pension funds and private equity funds.

Shopping centres account for the biggest slice of SA’s commercial property market at R340bn, followed by offices at R228bn and industrial property at R187bn. The hotel and leisure property sector is worth R25bn.