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The big spenders

Last week, Vukile Property Fund said it would spend R1.5-billion to acquire a portfolio of 20 properties in Durban, Pretoria, Bloemfontein and Cape Town from Sanlam Life Insurance.

Redefine Properties paid R1-billion for six office buildings in Johannesburg and Cape Town, while the Vunani Property Investment Fund spent R354.5-million on office properties in Rustenburg, Port Elizabeth and Cape Town.

The Investment Property Databank said commercial property returns stagnated in the first half of 2011, reflecting a slowdown in local and global economic conditions. Offices posted just 0.1% capital growth, with overall sector returns hit mainly by the poor performance of inner-city offices.
The aggregate national vacancy level stood at 6.8% at the end of June 2011, with office vacancies at 11.7% being of particular concern for landlords. Rising costs also dampened returns.

The latest Rode Report on the property market in SA's cities predicts no improvement in the demand for office space in the third quarter of the year. Erwin Rode, the publisher of the report, said this was due to global market volatility.

"Uncertain economic conditions are obviously affecting business confidence and must be making firms think twice about expanding their premises or hiring new staff. The result will no doubt be a continued lacklustre demand for office space to rent and thus, for now, moderate growth in rentals remains the most likely outcome."

Rode said, nationally, office rentals in the third quarter could only muster growth of 5% compared to the third quarter of last year, a slump from the previous period's 9% growth.

South African Property Owners Association (Sapoa) statistics for the third quarter shows vacancies have declined to 10.5% since the beginning of the year. While this was encouraging, the statistics also reflected an increase of 10% in office space vacancies compared to last year.
Laurence Rapp, CEO of the Vukile Property Fund, said the fund was taking advantage of the dip in demand - and the lower prices that come with it - to diversify its retail-heavy portfolio.

"It must be borne in mind that property moves in cycles that are linked to the economy, among other factors," he said. "We think it is a good idea to be buying these assets when the market is low and not at the top of the market when prices rise. While it is always impossible to determine the exact bottom of a market, we think we must be at or near the bottom, and therefore believe now is a good time to buy."

The properties Vukile is buying do have vacancies, but purely as a result of the cyclical nature of the market and not because the properties are poorly located, said Rapp.

"We believe there is upside potential in the assets - in terms of being able to upgrade or revamp some of the bigger assets, improve the current vacancy position, and also in terms of the rentals being charged.

"The vacancies on the portfolio we are acquiring are at 14%, and we have not paid for these vacancies in the valuation, so there is some upside in the deal. A large part of that vacancy is attributable to two properties, one of which is a vacant warehouse/retail property in Bloemfontein. Excluding that property, the vacancy is sitting at around 10% on the portfolio being acquired, which is in line with the recent Sapoa office vacancy report."

Rob Kane, CEO of the Vunani Property Fund, said it decided to break with the conservative strategy it adopted in response to lower rental expectations and budgets for the past three years after seeing some "solid opportunities in the office market".

"In recent months we have bought four very stable assets, one in PE, two in Rustenburg and Foretrust in Cape Town. All the properties are in areas that we believe are strengthening," said Kane.

"Our research has indicated that there are few, if any, comparable properties to which the tenants can relocate. This is not a cause for us to be complacent, but it does underpin the investment argument, and provided we manage the properties well, we believe we will have those tenants in our portfolio for many years to come."

Kane added that Vunani had, through the Foretrust purchase, established a presence in Cape Town's Foreshore node, which had seen a revival in occupant interest recently.
"In recent years, there have been a lot of developers quietly acquiring properties in the node, and it makes sense for the dominant landlords in the area to work together to enhance the streetscape."

"The recent approval of the doubling in size of the [Cape Town International] Convention Centre will lift the Foreshore area. Foretrust is almost entirely occupied by government, with more than six years to run on the lease. The current 9% vacancy provides us with some material upside and we are confident we will be able to fill this vacancy after the transfer," said Kane.


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  • Adriaan Grove - posted 24 Nov 2011 09:04 AM                                    

    It's like Monopoly

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