The next seven biblical years

This time last year, things looked rosy for South Africa; the country’s top economic experts were forecasting robust growth of around 5% per annum. In their own, December 2007, forecasting publication, property economists Rode & Associates forecast great potential in real office and industrial rents over the next few years, predicting robust demand for office and industrial space that was expected to keep vacancies low and nominal market rentals growing in excess of building-cost inflation. Now things are looking less optimistic: so what’s happened?

Says Erwin Rode: “The SA landscape for both the economy, as a whole, and for property in particular, has changed drastically since December 2007, and it’s hit us as a country on our blind spot. We now have 10%-plus consumer inflation, which is not expected to subside in the near future and interest rates that continue to climb. The 5% economic growth that was predicted is currently standing at only 2.1% for the first quarter of 2008. As a result, Rode & Associates is in the process of re-evaluating its data across the board, taking all these unforeseen trends into account in order to bring as much accuracy as possible to scenarios going forward.”

For example, since economic growth and building costs are key drivers of market rental growth, a re-examination of all rental growth prospects is a necessity. Says Rode: “Should the economy still be able to muster annual growth of about 2% to 3% and replacement costs remain fairly high, the real rental trajectory for the next few years should still head north, but most likely not as steeply as previously forecast.”

Economists, adds Rode, are not clairvoyants. “In fact, the volatility in the current market illustrates the limitations faced by the forecasting profession. No one could have predicted, a year ago, what the economy would be faced with at this point. And I believe, even though we are an emerging economy, we tend to forget this when the going gets really good; it takes a while before the truth hits the broader public because it’s very un-PC in a developing country to be pessimistic about the future.”

Adopting a head-in-the-sand attitude has affected many South Africans, believes Rode, and thus, when the crisis hits, it hits even harder than it should. “There were those of us who put our money on an energy crisis as far back as two years ago,” notes Rode. “In fact, that’s when my company first invested in a generator!”

“Of course, we now have an Eskom cap on the economy’s growth rate because of the energy crisis,” says Rode, “and until that crisis is resolved seven biblical years from now, we will see no more than a maximum 3% growth.”

“What makes this so terribly sad for South Africa is that, globally, we are currently presented with a once-in-a-lifetime opportunity to participate in the international commodity boom being led by China and India. And we’re missing it!”

On the residential front (and with the company accelerating its research in this market), economist John Lottering of Rode & Associates has picked up a 9-month lag between rising interest rates and the effect these have on house prices. Says Lottering: “2010 property enthusiasts will need to start revising their thinking too in the face of future interest-rate rises and other ongoing challenges to our economy!”

Article from: www.sapropertyinvestor.co.za