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Next property peak 'about 5 years away'

Historical trends suggest that the South African property sector experiences a boom about every 10 years, with significant construction booms occurring every 20 years.

The property cycle peaked in the early 1980s and the property market continues to feel the aftermath of the latest investment and construction boom of 2001 to 2007. Although the next peak in the market is at least another five years away, investors should see a steady improvement in market conditions during 2013 and 2014. In commercial property this will be reflected in a gradual lowering of vacancies and a rise in real rentals.

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

Over the past five years the market has experienced spurts of positive performance which mirrored periods of declining interest rates. The lowering of interest rates since 2010 helped maintain levels of affordability in the housing market, and also increased demand by investors for listed property.

With interest rates largely expected to remain constant in 2013 and most of 2014, the performance of the property sector will increasingly be driven by economic growth prospects, the strength of household balance sheets and fundamentals in the property market. But continued poor performance of the Eurozone economy and revised downward forecasts for the Chinese economy has dampened South African growth prospects. The strong consumption expenditure, which provided an important catalyst for the retail sector of the commercial property market, is starting to wane.

In 2013, residential property values are expected to increase by 5 percent to 6 percent and will therefore show little real growth. Investors in commercial property will primarily be focused on maintaining returns through a reduction of vacancy rates and operating cost escalations. In the third quarter of 2012 average vacancy rates for A-grade office properties in Braamfontein, Johannesburg, reached a 10 year high of 19.9 percent. In Cape Town's Claremont office node A- grade office vacancy rates increased from 8.3 percent in the third quarter of 2008 to 17.7 percent in the third quarter of 2012.

It is unlikely that rental increases in the office sector will rise in real terms until of f ice vacancies decline to below 8 percent.

Although the market will be operating in an uncertain macro-economic environment in 2013, the slowdown in residential and commercial building activity will result in supply being gradually mopped up as the year progresses.

Investors should also start to experience a market that is gradually moving up the property cycle, with the peak of the cycle still some distance away.

(*Francois Viruly is Professor in the Department of Construction Economics and Management at UCT.
Weekend Argus - Saturday Edition)


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