With the end of the year fast approaching, property investors are urged to look forward to 2006 and take into account where the market is heading.

With the end of the year fast approaching, property investors are urged to look forward to 2006 and take into account where the market is heading.

This is according to Bales Delaporte, a niche property investment company that has in excess of 30 years experience in the commercial property market.

“We have noticed a subtle change in the commercial market recently and feel that interest rates are likely to start moving upwards from next year.”

While the extent of the moves is undeterminable, say Bales Delaporte, it is unanimous that they will be upwards - not forgetting that interest rates are at their lowest in 40 years. “Investors need to take into account the mathematical percentage effect of a 1% rise in interest rates. Previously a 1% change came off the back of say an average 15%.”

“Now the prime lending rate is only 10,5% and a 1% change has a far greater effect on one’s cashflow,” cautions Bales Delaporte.

“Hopefully any increases will be in less than 1% increments, but the effect nonetheless remains the same and those investors with marginal cash-flow need to be very careful going into the new year.”

Thankfully, according to Bales Delaporte, commercial property rentals are increasing steadily and many investors anticipate rental increases to be higher than those of interest rates. “However, residential investors are not so lucky in that there is a lot of pressure on residential rentals due to a large amount of vacant properties entering the market early next year.”

Bales Delaporte advise that investors with severe interest rate exposure should look at considering various hedging instruments to alleviate against interest rate fluctuations.

“Purchasers have also started to evaluate more closely the investments they are considering and are asking for more information than before. This is due to the fact that investors have become far more educated and want to weigh up all the attributes of an investment prior to purchasing. Sellers must be aware of this and need to supply sufficient information, they also need to be aware that during 2006, the volume of purchasers is likely to decrease prompting a revision of sales strategies accordingly.”

“The listed property sector has enjoyed a buoyant three years on the back of the declining interest rates,” says Bales Delaporte. “The proliferation of funds flowing into this sector has ensured an unprecedented demand for directly held property investments, pushing capitalization rates lower and prices higher.”

“By their very nature, listed property funds that have a gearing element have similar attributes to bonds – when interest rates go up, the price comes down. Investors who have invested in this sector with the aim of getting capital returns higher than inflation should be reconsidering their options,” cautions Bales Delaporte.

“With many listed funds purchasing properties on a bulk scale to ensure that the total value of their fund increases, the next phase is going to have to be a solid asset management process to weed out any non performing investments.”

Bales Delaporte believe that most asset managers are under-equipped to handle the volume of work necessary in these large funds and that there is likely to be a period where asset managers are required to hone their skills and capabilities.

“This is likely to lead to ‘musical chairs’ with the best skills demanding higher packages and hence investors in the listed property sectors need to not only keep an eye on the effect of interest rates, but also on their asset managers.”

Bales Delaporte concludes that the market is simply entering a new phase and investors must actively manage their property investments accordingly. “Stay close to knowledgeable property specialists - 2006 is going to be different.”

Article by: Bales Delaporte - www.balesdelaporte.co.za