Residential boom peaking, but office boom just starting

07-08-2006

The housing boom may have peaked, but the good news on the property front is that office rentals are likely to double over the next few years, Erwin Rode, CEO of Rode & Associates said in his prognosis on the property market at the recent Rode Conferences.

Rode market data since 1965 indicates that houses are fully priced and industrial and office rentals are at a long-cycle low. Industrial rentals started climbing 18 months ago, and office buildings are set to follow.

Based on the dramatic decline in vacancies, a healthy prognosis for economic growth, and the cost of developing new office stock, Rode expects office rentals to rise rapidly.

“To make new building viable, current office rentals will have to jump by about 70%. What’s more, with resources constrained, building-cost inflation is likely to remain strong, which means that by the time rentals have caught up, the goal-posts may have shifted.”

Rode noted that for similar reasons, industrial property rentals also still have scope for upward movement, albeit not to the same extent as the office market.

“At the moment, South Africa’s competitive edge over the rest of the world is shopping. We shop better than everyone else and that is why shopping centre rentals are also likely to continue delivering satisfactory returns. And as long as South Africans continue to shop, warehousing space to store goods will be in demand.”

The strong growth expected from directly-held property suggests that the income streams from listed funds are likely to show strong growth over the next few years.

“Strong expected income stream growth coupled with the recent up-tick in listed income yields, which are likely to move down soon enough, may signal a buying opportunity for investors,” says Rode.