Smart investors will get in before the office-stock rush

01-08-2005

Listed funds are generally reporting that properties at appropriate yields are hard to come by these days. That is especially true as far as retail property is concerned. This situation is largely caused by the growing influence of syndicators, as neighbourhood shopping centres continue to be snapped up by syndicators that outbid listed funds.

Syndicators are normally willing to pay more for a property than their listed counterparts, explains Rode’s Report editor Garth Johnson, because they usually represent investors who are happy with call-deposit-beating returns. When listed funds purchase properties they are generally led by the level of the funds’ listed income yields, which, in turn, is closely correlated to long-bond yields.

The marked decline in interest rates over the last year or two has seen the income yields of listed funds decline significantly. More recently, this decline has been compounded by a rosy prognosis for income growth for non-residential property.

“As a result, listed funds are currently willing to buy neighbourhood shopping centres at a capitalization rate of about 11%, whereas a year ago they wanted 12,5%. But the decline in interest rates has also led to syndicators dropping their minimum desired income return to roughly 9,5% — although we have it on authority that some are willing to go as low as 9% in good locations. This is quite low if you consider that listed funds are presently willing to buy regional shopping centres at about 8%”, says Johnson.

“The competition in the small-shopping-centre market has become so fierce — especially in the Cape Peninsula and Gauteng — that syndicators may find it worthwhile rather pursuing office and industrial buildings, which are easier to come by, and are generally better priced. This applies even more so to listed funds, which enjoy the diversification benefits of a portfolio.

"The smart investor will be eyeing industrial and, specifically, office buildings right now", says Johnson.

PS: The syndication fraternity has become such a dominant force in this segment of the market that Rode has now expanded its capitalization-rate survey to include this group of buyers. The first results will appear in the third quarter issue of Rode’s Report.