The office may yet be a hit with market

ALTHOUGH the office property sector is still lagging retail and industrial properties in terms of total returns, it is starting to recover.

Francois Viruly, property economist with Viruly Consulting, says there could be opportunities for investors in the fixed office property market in the coming year.

According to the latest Sapoa/ Investment Property Databank (IPD) South African property index, the recovery in the local office market gathered momentum last year with offices’ total returns — which include total movements in property valuation and net income — almost doubling to 16,7%.

In 2003 offices posted a total return of 8,9% while in 2002 a 5% total return was recorded.

IPD attributed the turnaround to the fact that the capital growth rate was positive for the first time in four years at 5,5%. But net income growth was only 0,2% as the vacancy rate remained substantially high.

There has been an oversupply in decentralised office nodes in SA for some years because of major overdevelopment on a speculation basis. However, the office market has been gradually improving with vacant space being mopped up.

Viruly says there are many investors who have done well in the residential market who will be looking for opportunities in other sectors of the market in the next year, particularly in the office market. “Some of these investors will be looking to enter the office market through sectional title schemes,” he says.

Another incentive for investors may be that certain leases in the office sector will come up for renewal in the next 12 months and rentals could move significantly higher.

“A lot of leases in the office market were signed when the market was struggling. When they come up for renewal we will see those rentals going up,” says Viruly. There are also small users who would buy rather than let, especially in a low-inflation, low-interest rate environment.

“Of course there are risks. If interest rates suddenly move upwards, that would make renting cheaper,” he says.

“If you are an opportunistic investor looking for capital growth, I think the opportunities could well lie in the office sector, where many of these offices are underpriced.”

Andisa Securities property analyst Len van Niekerk says there is still concern about the office market when it comes to income growth.

But, he says, there are signs the sector is turning around.

“I think there are opportunities but the age and condition of the buildings is important. Office tends to be a throwaway item. It quite easily suffers from obsolescence. There are some older buildings which will probably need to be refurbished to make them attractive again.”

Van Niekerk also says there could be increased rentals when some leases that were signed in a struggling office market come up for review.

Gerald Nelson, MD of listed property unit trust Sycom, which has a significant office portfolio, says that the trust is already “seeing a strong upward correction in property valuations in the office sector”.

But Nelson says prices in the office sector have already moved upwards and “there are no bargains around”.

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