COVER STORY
Owning your own home can be the ultimate investment but it is not necessarily an asset that is putting money into your pocket
COVER STORY
property is simply a function of a number of factors . This includes rental growth achieved through revising rentals when leases are renewed ; ensuring rental escalations are built into lease agreements , cost controls to protect margins and balance sheet gearing .
The listed environment gives an investor great exposure to commercial property specifically retail , industrial and offices sectors . It is important to understand rental income drivers in the various categories . According to Kalla , ‘ Retail listed funds have much lower vacancies compared to offices for example , which is quite volatile at the moment . Industrial is steady . With a diversified portfolio you are not always clear as to the vacancies between the categories .’ Natasha O ’ Reilly asset manager head of Eris Property Group says , ‘ that currently there is definitely a more depressed offices sector market at the moment with higher vacancies . Retail for example has a diversity of tenants with more secure national tenants which gives more secure income .’
Anton de Goede , property specialist and manager at Coronation Fund Managers agrees that the office sector is more risky at the moment and it needs to ride the poor economic cycle . He says that lawyers in particular are big clients of large A-Class office space but even that is limited and the potential for vacancies is high if you are reliant on one tenant for bespoke properties . ‘ That can be a risk as there is not much new interest out there . ‘
If you look at SA GDP growth in 2015 it averaged at 1,4 % whereas 2016 GDP growth is expected to average around 0.5 %, which affects investor returns . The slow growth does not support good rental income growth , which has previously been responsible for excess inflation distribution growth . Operating margins have also come under pressure due to above-inflation cost increases in admin services , which in most cases is beyond a property manager ’ s control . Increases are normally passed on to the tenants but in the current economic environment , some increases have had to be absorbed by the property companies themselves .
Gearing , has always been the major tool to accelerate distribution growth , but it too has its challenges going forward . According to Kalla the cost of funding is getting higher which is the reason why many funds are looking offshore . A local listed property counters gearing of about 29 % on average and the funding cost of hedging of about 94 % which are metrics considered as conservative . With a recent 20 – 25 % currency improvement in the rand , low interest rates make offshore funding cheaper according to Kalla .
Most SA listed property companies also have the benefit of offshore exposure without having to move your funds offshore . The reality is that the local economic landscape is deteriorating . Given the lacklustre local fundamental backdrop , listed property funds are increasingly looking elsewhere to generate better returns . The advent of relatively newly established funds like New European Property Investment ( NEPI ), Redefine International , Stenprop , New Frontier , Rockcastle , Hyprop and Redefine , have all made investments into Eastern Europe and UK . They are buying properties at around 7 % yields , funded with Euro-denominated debt of around 4 % where you immediately have positive results . The focus is mostly on ramping up earnings first and property fundamentals second .
Owning your own home can be the ultimate investment but it is not necessarily an asset that is putting money into your pocket
Real estate is one of the strongholds in the South African economy and is a large and important sector of our economy and the growth trend is growing . According to the Property Charter the real estate market in South Africa is valued at R5 , 9 trillion . Residential is valued at R3 , 9 trillion , Commercial is valued at R1 , 3 trillion and the rest hospitality . In property terms South Africa has the sixth 6th most mall space in the world with over 200 shopping centres . This makes real estate a strong investment candidate before anything else .
WHAT IS CAP RATES ?
The cap rate or capitalization rate is the rate of return on a real estate investment property based on the income that the property is expected to generate . The capitalization rate is used to estimate the investor ’ s potential return on his or her investment .
The capitalization rate of an investment may be calculated by dividing the investment ’ s net operating income ( NOI ) by the current market value of the property , where NOI is the annual return on the property minus all operating costs .
Capitalization Rate = Net Operating Income / Current Market Value
So , for example , if a property was listed for R10 , 000 , 000 and generated an NOI of R1,000,000 , then the cap rate would be R1,000 000 / R10 , 000 000 , or 10 % cap rate
16 SEPTEMBER 2016 SA Real Estate Investor www . reimag . co . za