Commercial property sector forecast to pick up

Market conditions in the commercial property sector are expected to improve steadily during the next two years despite the next peak in the local property market being at least another five years away.

This is the view of Francois Viruly, a property economist and professor at the department of construction economics and management at UCT, who said yesterday that historical trends suggested the local property sector experienced a property boom about every 10 years with significant construction booms every 20 years.

"The South African property cycle peaked in the early 1980s and the property market continued to feel the aftermath of the latest investment and construction boom of 2001 to 2007," he said.

Viruly expects the steady improvement in the commercial property sector to be reflected in a gradual lowering of vacancies and increase in real rentals, although office rentals were unlikely to rise in real terms until vacancies declined to below 8 percent.

But Viruly stressed the timing and shape of the next upward cycle would be dictated by the performance of the macro economy, interest rate movements and the property sector's ability to maintain a balance between demand and development activity.

With interest rates largely expected to remain constant this year and for most of 2014, the performance of the property sector would increasingly be driven by economic growth prospects, the strength of household balance sheets and fundamentals in the property market, he said.

Strong consumption expenditure, which provided an important catalyst for the retail segment of the commercial property sector, was also starting to wane, he said.

Erwin Rode, the chief executive of property services company Rode & Associates, said the good news from a historical perspective was that office and industrial properties were not overvalued nor had they developed "an irrational bubble".

But the bad news was that the outlook for the property market was also a function of what happened in the economy.

"The problem is that because the economy is quite lacklustre and forecast to remain so, I don't expect any fireworks from offices and industrial property over the next year.

"In fact, I'd be happy if they held their ground and rentals moved sideways," he said.

Rode added that the low morale of the business sector was affecting the office and industrial property sectors, which meant that, because of uncertainties, it was not expected that many businesses would hire extra staff or expand.

"This is a worldwide phenomenon and is not just happening in South Africa."

Rode said the "good days" for retail property and shopping centres were also over for some time because consumers had been under a lot of financial stress and interest rates were not expected to continue declining.

He said consumers currently had very high debt levels and, because of the slowdown in the economy, the Treasury was under huge pressure and it was unlikely there would be many concessions to consumers in the Budget.

But Rode added that the most important reason for him expecting the retail property sector to be under pressure was that the "crazy salary and wage hikes" that had occurred over the past few years were unlikely to continue.

"All these factors are going to put a damper on consumption and retail property. The outlook for the commercial property sector is very pedestrian but not a catastrophe. The property market is still very strong and in essence healthy compared with other markets."

(Business Report)

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