Commercial property squeeze
The commercial and industrial property market is continuing to perform strongly in all categories including office, retail and industrial.

Gerhard Zeelie, head of First National Bank (FNB) Commercial Property Division, said this is driven by a strong economy combined with constraints in the supply of new stock.

"Two years ago there were significantly higher vacancies than today, especially with regard to office space. However, vacancies have declined steadily due to the higher level of economic activity and the resultant demand for office space.

"National office vacancies are running as low as 5% to 6%," Zeelie said.

He said there was a marked shortage of industrial space, which was particularly true of light industrial space able to accommodate businesses ranging from panel beaters to import/exporters.

"Industrial parks in which developers open up full title stands within a park environment are also popular," Zeelie said.

He added that businesses tend to look for industrial space with a small office component at the front of the building that can act as a reception area.

"If we fund the development of such a park, it is usually 80% sold before funding is needed," Zeelie said.

Also, the yields on both office and industrial space have decreased significantly over the past 12-18 months due to the perceived decline in risk associated with these projects.

With demand high and vacancies low, investors are prepared to accept yields of 9% to 10%. However, there are still some bargains and some property purchases are still being made with yields of 12% to 12.5%.

"Building construction costs have escalated and some of the materials have doubled in price over the past 12 months. Therefore, if you can get a rundown property at the right price and in a good area, refurbishment is a good option.

"However, investors should be aware that refurbishment usually increases demand for the space but not always a corresponding increase in the rental so it is easy to over-capitalise on a property. It is better to add space if you can," Zeelie said.

According to Mark McCreedy of McCreedy Friedlander Property Consultants, the commercial and industrial property industry is experiencing unprecedented growth in terms of take-up of space, rental increases, and land price increases. And while the market performed well last year, 2007 is proving at least as buoyant.

"Land is a limited resource and it is becoming more difficult to obtain. South Africa is a large country so there is land available, but getting land through the rezoning process is expensive, onerous and time-consuming.

"Environmental impact studies come into play and, more often than not, developers have to produce full scoping reports and obtain environmental approval before they can obtain rezoning," McCreedy said. This process can take up to 18 months.

Therefore, developers with land that is already zoned for commercial, retail or industrial use are poised to take advantage of the property boom.

Construction costs are leaping ahead and this is driving up rentals.

"The cost of building materials is rising so fast that quantity surveyors only validate their figures for a month," McCreedy said, adding that building costs vary depending on the type of development, but R8000 per square metre is becoming the norm rather than the exception.

Business Day

Article by: Andrew Gillingham - www.eprop.co.za