Commercial real estate: world's top returns

South African property investors enjoyed biggest gains in 2008 - latest stats, other asset classes.

Investment in South Africa's commercial real estate market produced double-digit nominal total returns for 2008, at 13.0%, according to the SAPOA / IPD South African Property Index. However, with last year's high inflation rate of 11.5% factored in, these returns equate to inflation-adjusted ‘real returns' of just 1.3% for 2008.

The nominal returns were sharply down on the 27.5% recorded in 2007, and the lowest in six years. This performance is nevertheless the highest in the IPD indices for all countries published to date and contrasts with the pattern seen across Europe, particularly in the UK and Ireland, where capital values plummeted last year due to yield rises across all sectors. The nominal total returns for the UK and Ireland in 2008 were -22.1%, and -34.2%, respectively. In Continental Europe, the spread of performance so far ranges from -4.7% in Norway to 5.1% in Finland. In Asia Pacific, South Korea - which returned 26.7% last year - came in at 4.0%, while Australia recorded 1.8% and, in North America, Canada produced 3.7%.

The South African performance was driven by robust income growth. Capital growth, though markedly slower than in 2007, was nevertheless positive across all sectors which further underpinned the result. Last year's performance was led by the Industrial sector which recorded 18.1% total return, followed by offices with 14.0%, and retail at 11.1%.

Income returns for industrial and offices were 9.0% and 9.1%, respectively while Retail provided 7.8% to produce the all property average income return of 8.3%. The strength of capital growth differed more widely across the sectors. Industrials led the way, returning 8.4%, followed by offices, at 4.6% and retail, at 3.1%, to produce an average of 4.4% compared to 17.5% last year. All property yields moved out by 20 basis points over the 12 months, ending December 2008 at 7.7%.

Compared to other asset classes, South African direct property outperformed equities and property equities. In 2008, equities returned -23.2% according to the JSE All Share Index, while the JSE PLS Index and the JSE PUT Index returned -2.3% and -9.7%, respectively. However SA property returns lagged behind the bond markets, which returned 17.0%, as measured by the All Bond Index.

Long-term property returns remain high, with three and five annualized total returns at 22.4% and 24.1%, respectively. Over the full 14-year history of the index, annualized total returns now stand at 16.2%.

Stan Garrun, Managing Director at IPD South Africa, said: "The relative resilience in SA can, in part, be ascribed to economic effects lagging the international cycle and less turbulent financial markets. We have not witnessed the rapid re-pricing of real estate that is being experienced elsewhere, certainly not on the same scale.

He continued: "Property fundamentals are still coming through quite strongly. However, it is important to bear in mind that the inflation-adjusted total returns, at 1.3%, were modest compared with the average annualized real return of 9.3% over the last 14 years."

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