SA Property - Opinion

A recent article in the Financial Mail by Pauline Larsen says global investors on the prowl for untapped property investment opportunities are starting to discover South Africa. Classic Business Day gets independent property economist François Viruly on the line for his opinion

GIULIETTA TALEVI: The South African listed property sector has been the top performer over the past three years in the Ernst & Young 2006 Global Real Estate Investment Trust Report, where South Africa returned around 34%, and in the past year South Africa racked up returns of 23% that was only outstripped by New Zealand. François, can these returns be sustained? I believe you’re slightly sceptical that the great returns we’ve seen from the listed property sector can actually continue into the future…

FRANÇOIS VIRULY: The point to bear in mind first of all is that when we make international comparisons in South Africa we start with a long bond rate of about 8% so that’s the first point to bear in mind. The second point to bear in mind is returns have been in the twenties and so on, but one has to bear in mind that in many emerging countries like China for example the sector performed at around 140%. So I think there is a lot of competition out there, and we will have to really push those returns upwards if we are going to compete with emerging countries. One also should bear in mind that much of the listed sector is sitting at yields of 7% or 6% at the moment, which means that we are going to have to show very significant capital growth if we are going to repeat the returns we’ve had in the past.

GIULIETTA TALEVI: Absolutely. If we are going to try and repeat the performance of the past, what are we going to have to do to get those kinds of returns?

FRANÇOIS VIRULY: If you’re sitting at a yield of 6% the chance of those yields declining much further is fairly slim - they’re already basically below the long bond rate - so it’s a matter of getting those rental increases to 10% and even higher. As far as the office sector is concerned I think the chances of that is pretty good - we are sitting with historically very low vacancy rates at the moment of 2% and 3% - so I think that those rentals should rise and give us capital growth. Whether that will be the case in the retail sector I’m not so sure - retail sector rentals are influenced by consumption expenditure and the turnover clauses that tenants pay.

GIULIETTA TALEVI: Pauline Larsen says the million dollar question is whether the reports will attract more investments - do you think the positive reports we’ve seen recently will?

FRANÇOIS VIRULY: What’s interesting at the moment is that on the one hand yes, I think foreign investors have been looking at South Africa - look at what’s happened to the V&A Waterfront - but at the same time South African property investors are also looking at opportunities outside of South Africa to a much greater degree than in the past. I think that relates to the whole point that if you are looking at investing in South Africa at the moment, and certainly as a foreign investor, you’re coming under enormous pressure to actually build your own stock. I think that’s true for South African investors - where the stock is just not out there - and for many South African investors it’s actually easier to find that stock outside of South Africa. So I suppose the point is that on the one hand foreign investors are looking at South Africa, but I think South African investors are also looking at opportunities outside our borders.

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