PROPERTY: Commercial Property Strategy for 2009
Recent Western Cape Business News
With the end of a turbulent and unforgettable year fast approaching, property investors will be sitting down and asking themselves “where to for commercial property in 2009?”
According to Bales Delaporte, even with their combined 40 years experience in the commercial property market, the crystal ball looks very misty for the year ahead.
“There is no doubt we will all come out of this. It is really a matter of when,” says Tony Bales.
“As Clem Sunter recently asked, are we in a “V” market or “U” market? More bearish shapes have also been proposed, being “wok” shaped or even “L” shaped. So, timing is hence of the essence and the billion dollar question is how long before things look up again?”
After visiting the UK and Europe twice during 2008, Bales’ conclusion is that the northern hemisphere is in a far worse situation that us sitting here at the southern tip of Africa. “But, these developed economies have a major effect on the SA economy and hence we have to conclude that SA will be part of the global slow-down whether we like it or not.”
What effect will this have on SA Commercial Property?
“Bales Delaporte believe that cap rates will remain in a tight band,” says Bales. Possibly even weakening in the short term. Already many SA property players are purchasing offshore property at yields well in excess of those achievable in SA (10% +). The big variable is rental growth!”
“Global GDP forecasts are down significantly. Broad market rental growth is directly proportional to GDP fluctuations, hence the huge rental growth expectations must be amended to reflect the recessionary global environment. We are a little pessimistic on rental growth across the board, especially in the retail sector.”
A leading UK property economist has predicted a -2% “growth” in market rentals for the next four years, with retail rentals being worst hit. This would explain the higher yields in the short term.
According to Bales, Bales Delaporte have noticed reluctance by tenants to pay higher rentals and many businesses are now prepared to move from A-grade premises to lower grade premises in order to save costs. “Property owners with existing or looming vacancies should expect a longer time period to let their properties, or be prepared to negotiate lower rentals.”
“The fundamentals of many businesses and industries are changing fast and will have an effect on commercial property across all sectors of the economy.”
How are changes to energy going to effect business and consequently their property requirements? How are environmental changes going to effect property?
“Unfortunately the “V” market is likely to be more of a “U” or even a “wok” shape, with a few difficult years for businesses before they get back into growth gear and able to absorb rising rentals. Commercial property investors will have to manage their tenants far more diligently and cautiously in the while ahead.”
“2009 is likely to be a year of consolidation and conservatism. Growth in property values is likely to only be linked to rental growth or growth in net incomes rather than any drop in cap rates,” concludes Tony Bales.
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