Property Market Promises Sound Investments

Low interest rates, solid economic growth and an appetite for property investment as a compelling asset class had combined to propel the sector to the fore, according to the just-released SA Property Report 2006.

Commissioned by JHI Real Estate, the report shows that in the past year, real house prices exceeded the 1984 and 1970 peaks and investors are now seeking out opportunities in commercial and industrial property markets.

JHI’s report said the South African All Property Index achieved a record 30,1% return last year with the previous low return of 5% reached in 1998. The strong return and rerating reflected the merging of property and economic fundamentals where supply matched demand.

“Business confidence across the commercial property terrain remains strong with retail, industrial and office enjoying similar levels of confidence in the short-term,” JHI managing director, Bongani Khumalo said.

He said the medium-term expenditure framework showed a shift from social spending to infrastructure and economic services, which was bolstered by “a rigorous capital investment” across the economy.

The report speculated that the boom within the R120bn township housing market suggested the national economy was growing more rapidly than reflected in official statistics. Traditional white suburb sales were also sparking the fledgling secondary property market in the townships.

“This dormant secondary market in the townships and informal settlements could be worth R68bn … clearly South Africa has a major window of opportunity given our legal property systems, as well as a housing focus set to dominate the agenda for many years to come,” Khumalo said.

He said the entry of a growing number of Africans into the higher income bracket was “good news for South Africa” and fuelled the debate that the 6% growth target was achievable.

The report highlighted a burgeoning demand for sectional title office and industrial properties, compounded by the lack of available quality stock. Coupled with the residential market, the sectional title market was projected to be South Africa’s fastest-growing form of property ownership over the next decade.

Institutional investors were also returning to the property market with insurance giant Sanlam expressing “a new appetite for investment” and spending R1bn on developments and acquisitions. Old Mutual Property group, formed via the merger of Old Mutual Properties and the Marriott property business, was the largest fund manager on the JSE, but had not shown its intention to list the prime retail assets Menlyn Park (Pretoria), Gateway (Umhlanga) and Cavendish Square (Cape Town).

Khumalo said globalisation had put local properties “firmly on the radar screens and portfolios” of international investors. Although traditionally focused on the residential market, Khumalo believed the solid performances achieved by the commercial investment segment would raise this profile among foreign buyers.

Increasing market capitalisations and improved liquidity would also attract international fund managers to listed South African property stocks, while local fund managers were seeking to raise their global exposure.

Annualised returns over the past four years have seen the sector deliver 30%, making it among the top performers on the JSE. The report indicated total returns touching 14% were feasible in the current year with the property index appreciating more than 13% in the six months to June.

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