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Further rate cuts possible should rand remain rampant – economist

Owing to the strengthening of the rand, inflation will go down and there is a potential for a further interest rates cuts, FNB chief economist Cees Bruggemans told the South African Property Owners Association/IPD South Africa Property Index 2010 launch on Wednesday.

"There is a chance that the world environment will lead from the levels that we are in, to an exceptional repressing of the inflation rates, which is not expected by many people," argued Bruggemans.

He added that this would be a reflection of what was witnessed six years to seven years ago, as something similar happened then.

"The global context that I am taking into account, essentially favours a further strengthening of the rand and if the inflation rates response to it is favourable, then, we have not seen the end of an interest rate cycle."

Bruggemans pointed out, that while inflation rate should be held within ranges, it is premature now for an interest rates increases.

In fact, all real-estate markets measured by IPD globally, fell into negative territory over the past two years, including the US, Canada, Australia, New Zealand and Japan. In this context, South Africa's soggy market, was a top performer relatively, yielding the best return of 11 countries measured.

The UK market, which was the first to decline, appeared to be in recovery after a 3,5% return was delivered last year - a considerable turnaround from the -22,1% in 2008.

By comparison, the US, the world's largest commercial real estate market, suffered a steeper negative return last year, at -17,5%, compared with 2008's -7,3%. Throughout the rest of Europe, 2009 annual returns published so far have been broadly positive, the notable exception being Ireland, which delivered a -23,3% return, while the Netherlands returned -0,2%.

Denmark returned 3,9%, Finland 3,8% and Sweden 1,4%. Elsewhere, returns in Canada were -0,3%; in Australia, -2,2%, while New Zealand's return was -4,1% in 2009.

Relative to other asset classes, South African direct property underperformed equities and listed property, but outperformed the bond market in 2009.

Over three years, direct property outperformed all other major asset classes.

Long-term property returns were still in double-digits, with three and five year annualised total returns at 16,2% and 21%, respectively. Over the full 15-year history of the index, annualised total returns now stand at 15,9%.

Article By: Dennis Ndaba - Edited by: Kenneth Creamer - www.engineeringnews.co.za