Outlook for unlisted property gets rosier
23-12-2003
Investor sentiment towards non-residential property improved at the end of 2003.
The latest Rode’s Report (issue 2003:4) shows that capitalization rates finally appear to be softening, fuelled by listed property funds' insatiable demand for non-residential, directly-held property. This improving trend seems evident for all non-residential property, except industrials, says Rode’s Report editor Dirk De Vynck. Capitalization rates are the non-listed equivalent of the forward earnings yield of shares and hence declining capitalization rates are the result of rising prices.
Word in the market is that because of listed property's premium trading position relative to directly-held property, listed property funds can afford to pay more for good-grade unlisted non-residential property and still realize a profit on listing.
Even positive gearing is now possible on buying properties for a listed fund. Hence the decline in capitalization rates, says Rode’s Report editor Dirk De Vynck.
The capitalization rates of regional, community and neighbourhood shopping centres in all the major cities declined (strengthened) in quarter 2003:3. This implies that values rose.
De Vynck says that although one must be cautious in reading too much into one quarter's performance, it is still significant that the positive turn in investor sentiment was noticed in all the cities.
On top of the increased demand for good-quality, non-residential directly-held property from listed property funds, shopping-centre capitalization rates may also be benefiting from the continued good performance of retail sales, which in turn will further benefit from the declining trend in interest rates and the strengthening rand.
Further good news is that, in Cape Town at least, capitalization rates for CBD offices have also peaked, indicating that investors are becoming more upbeat on the CBD's future. This is only three years after the founding of the Cape Town CBD's city improvement district (CID).
The CEO of the Cape Town Partnership, Andrew Boraine, says his organisation set itself a target of three years from the CID’s formation to start seeing a peak and then decline in capitalization rates. "To start seeing a change in capitalization rates almost three years to the day is enormously gratifying," he says.
Turning to decentralized offices, capitalization rates in the major cities (barring Durban) are also declining, with Pretoria still holding on to its position as investors' preferred office destination. Again, the improvement can be because of the greater interest from listed funds, whilst it could also indicate that the oversupply from over-building is slowly being mopped up, and with it prospects for market-rental growth must be improving, says De Vynck.
However, the capitalization rates of industrial property in all the major cities are still firmly entrenched in their upward (weakening) trend. Although there are signs that the manufacturing, storage and distribution sectors of the economy are readying themselves for a pick-up — which should underpin a recovery in the industrial property market — investors will need more convincing before they venture back into this long-suffering property type.
"What is needed is a visible increase in the demand for industrial space as reflected by rising real industrial rentals. And when it does happen, the about-turn in industrial property could be sudden. Then the increased demand for directly-held property by listed property funds should also spill over to unlisted industrial property," say De Vynck.
