Blog categorized as Property research articles

The below-par investment performance of most South African retirement funds over the past few years was recently again put under the media spotlight. Yet, some asset classes have done exceedingly well over this period.

Hurdle rates required by investors to induce them to invest in property were basically un-changed at 19% in quarter 2003:1 — a level at which they have been for many years. At the same time, the leaseback escalation rate got stuck at 10% or higher.

Ever since the fourth quarter of 1991, Rode’s Report (RR) has been publishing regression equations to calculate the capitalization (cap) rate of office-building and industrial-building properties.

In an inflation environment, the purpose of contractual rental escalation rates is to obviate the need to renegotiate the contractual rental once a year or so. In a hyper-inflation environment, this “or so” could be monthly, of course.

It is hard to believe that 15 years ago, the market rated listed property far superior to long bonds, a situation that has since been totally reversed. The question is why?

One of the outstanding features of the new South Africa and the ANC-led government is its stable macro-economic policies, with lower inflation being one of the biggest beneficiaries.

The nominal returns of institutional property have been in a secular downswing for the last 20 years, and the expectation is that this year the trend will continue.

The South African government sold the first inflation-indexed long bond in March 2000. Bids ranged from 10% to 5%, and only a small amount of nearly R500 million of the R189 — maturing in 2013 — was allotted at the cut-off price of 6,5%.

Way back in 1978, when I started doing my first tentative property forecasts, life was simple. The forecaster could assume, and bank on, an inflation rate of 15% or so. All metropolitan areas and all property types were growing at a similar rate, or so we assumed.

After more than a decade of austere monetary policy, South African property players are at long last lowering their profit and growth expectations.

We are all so engrossed in our daily lives that we far too often miss important milestones in our hectic lives. One such a milestone for Johannesburgers is the fast-approaching deadline to object to the new general valuation appraisal of their properties.

Commentators sometimes claim that house prices are about 25% below replacement costs, and that, hence, there is great upside potential for prices.

May 2000

Two years ago, listed property in SA stood at a discount of about 30% to directly-held real estate. This meant that there was a huge difference between the capitalisation rates of directly-held property on the one hand and the forward dividend yield of listed property on the other. Theoretic...

The South African government recently sold the first inflation-indexed long bond. Bids ranged from 10% to 5%, and only a small amount of nearly R500 million of the R189 – maturing in 2013 – was allotted at the cut-off price of 6,5%.

The government’s announcement of the introduction of capital gains tax (CGT) as from next year will have a profound impact on the way investors behave. This includes the property market.

Some investors grow up believing religiously in the infallibility of bricks and mortar as an investment class, others will never be convinced. It may have a lot to do with one’s risk profile and degree of ignorance.

Those of us who were brought up in an inflationary environment thought that this was how the world normally functions. Not so. The history of the world’s major economies shows that through the ages the normal state of affairs has been no or little inflation.

It is common knowledge that throughout the 1990s house prices in South Africa did not keep up with consumer inflation. The exception of course was your favourite metropolis, Cape Town, which bucked this trend quite dramatically.

Since timing is so crucial for property investments, it is worth dwelling on the property cycle, and where we are in this cycle.

When buying a property, location is not nearly as important as timing. This seems to fly in the face of conventional wisdom, so I better explain myself swiftly before the lynch mob gets the upper hand…