Real Estate Investor Magazine South Africa December - January 2014

INDUSTRIAL BY DONALD BETT Risks, Returns & Growth What does the future hold? D espite analysts and property professionals expecting a sluggish market in 2013, property investors and developers were positive about the South African commercial property sector. The lending company, Paragon Lending Solutions, says they have witnessed a surge in clients looking for funding for growth in 2013, compared to 2012. “Our research has revealed that clients are actively exploring property deals again and are forecasting steady growth in their respective businesses”, the company said. This generally means, throughout the year 2013, the company has experienced an increase in clients who were looking to expand their businesses in property development. There has been mixed sentiment, however, from industry experts on the outlook for 2013 with the general consensus that the commercial property market is only really expected to start picking up in 2014. However, with interest rates remaining unchanged, which is good for raising capital, the current economic climate is providing opportunities for developers and investors, but what’s needed is funding to start off. Despite the property market currently looking flat, people are optimistic as the sector remains an attractive alternative investment. Investors with access to capital and the ability to move quickly on a transaction were able to purchase excellent value in 2013. The South African Property Industry outperformed both equities at -2.8% (MSCI South Africa Equities) and bonds at -2.5% (JP Morgan 7-10 Year South Africa Government Bond Index) for the first six months in 2013. 56 The property sector delivered an improved 9.0% total return for the first six months of 2013. This is 30 basis points more than the December 2012 biannual total return of 8.9%. The performance growth came from high capital growth of 4.9% and an income return of 4.2%, for the period. The growth was driven higher by capital growth and firming of the rental yield by 30 basis points over the first half of the year. However, operating costs continue to pose a threat to the growth of the industry, increasing by 6.0% compared with December 2012. Demand for property rental in the country was generally stable by the fourth quarter of 2013, due to its position as an attractive regional base, resulting in high occupancy rates and increasing rents. Nevertheless, development plans going into 2014 remains well below pre-2010 levels. Due to this, it is expected that favourable absorption-completion dynamics will buoy the leasing sector in the short term, but unless development activity picks up, this indicator will serve as a hindrance to long-term growth. With the construction sector still in a period of stagnant growth, the industry shows few opportunities to help f ind its way out the difficult climate. For real estate firms with a higher dependence on the construction side, the risks are greater than for those with a portfolio of leasable space, as the slowdown in the project pipeline will go some way to rectifying the imbalanced supply and demand dynamics. South Africa’s 2012 property development growth came in at 2.5% year-on-year. This lends credence to the view that the slump has finally reached a bottom and that the construction sector is timidly returning to growth. However, despite government’s massive infrastructure investments plans, industry forecast maintains a cautious outlook for the medium term, with a forecast average annual real growth of just 3.5% between 2013 and 2017, due to difficulty in raising capital for projects, social unrest and populist policies. December January 2013/4 SA Real Estate Investor Major metropolitan areas, such as Johannesburg, Cape Town, eThekweni and Tshwane, have the highest population growth figures by far. This impacts the needs for housing, job creation, schools, and general infrastructure, including retail centres. Boasting higher population growth and household income than other provinces in South Africa, Gauteng and Western Cape will be the focus of shopping centre development in 2014, and beyond. The Gauteng Province and the Western Cape, according to Statistics South Africa, show positive increases in population numbers. Gauteng’s annual growth rate of 3% from 2001 to 2011 confirms its attraction for job seekers. The Western Cape annual growth rate is 2.6% for the same period. South Africa’s annual population growth rate was a relatively slow 1.5%. These two provinces also have the highest average annual household income. South Africa’s average household income is around R9 000 to R10 000 a month. Average income for the Western Cape and Gauteng ranges between R12, 000 and R13 000 monthly. 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Real Estate Investor Magazine South Africa December - January 2014 | Page 56