Commercial real estate still beats inflation - for now

Returns on commercial property fell sharply last year but still managed to beat inflation, according to the SA Property Owners Association/IPD property index, which was released yesterday.

IPD South Africa managing director Stan Garrun warned, however, that the relative resilience locally was in part a reflection of this country lagging the international cycle.

The positive returns in South Africa occurred as returns plunged in the UK and Irish real estate markets. Countries such as South Korea and Canada also held up.

Investment in South African commercial real estate produced a 13 percent return last year, compared with 27.5 percent in 2007, according to the index. After factoring in inflation of 11.5 percent, this gave an adjusted real return of just 1.3 percent.

Last year nominal returns, which measure capital growth and income returns, fell 22.1 percent in the UK and were down 34.2 percent in Ireland.

In continental Europe, where inflation is lower than in South Africa, countries surveyed so far ranged from a fall of 4.7 percent in Norway to a rise of 5.1 percent in Finland.

South Korea rose 26.7 percent in 2007, but growth slowed to 4 percent last year. Australia was up 1.8 percent and Canada rose 3.7 percent last year.

In South Africa returns were driven by rental growth, as is typical when property prices have peaked. Nevertheless, capital growth remained positive across all types of commercial real estate.

Once again, industrials led the way with an 18.1 percent rise, followed by offices at 14 percent and retail at 11.1 percent. The weak performance by retail property reflected the recession in the consumer economy.

In terms of capital growth, industrials led the way, returning 8.4 percent, followed by offices at 4.6 percent and retail at 3.1 percent.

Despite the sharply slowing total returns in commercial property, this asset class still outperformed equities and even property equities, according to the property index.

Last year the JSE all share index fell 23.2 percent.

But bonds performed better than all of the classes, returning 17 percent, as measured by the all bond index.

While commercial properties all showed nominal capital growth, the prices of residential properties have been falling, even before subtracting inflation, according to the Absa house price index.

Absa said large house prices were 2.4 percent lower year on year in nominal terms in February at about R1.36 million. In December they were 1.7 percent lower year on year.

Article by: Tom Robbins -