STAN Garrun is MD of IPD South Africa.
SUMMIT TV: A new property survey shows there was a moderate improvement in the sector in the six months to June, but the chance of a full-blown recovery is rather slim. Property owners association global information business, IPD, released its property indicator showing property overall rendered a total return of 5.9% in 2012 compared with 10.4% in 2011. What is the split between capital gains and income?
STAN GARRUN: The income part of it is 4.4% and the capital gain was 1.5%.
STV: How does that compare with the total returns made last year?
SG: Capital growth is on the up because it’s already above last year — for the whole of last year we returned 1.4% so that 1.5% is an improvement. That 4.4% simply annualising that is about the rate we had last year where we saw an 8.9% income yield.
STV: We saw a total return of just over 10% last year. What are you expecting for the remaining six months of this year?
SG: At the moment there is undoubtedly quite a lot of anecdotal evidence that things are beginning to improve — these figures show there isn’t a lot of optimism coming through from valuers or the data because of high operating costs and sticky vacancy figures — but other indicators around the sector should enable some demand to start coming back.
STV: Are you expecting the same returns as last year?
SG: Yes, but slightly up.
STV: That’s not a real return — that’s before inflation — so not so good for the property sector.
SG: If we got returns around 12%, with inflation around 6% — so these are not great returns…
STV: Over the past five years has there been a downwards trend?
SG: A sharp downwards trend. If one thinks back to the early and mid-1980s, we saw property returns in South Africa above 25% and even topping 30%. Following the global financial crisis we saw that slipping and in 2008 that came down to just over 9%. It then picked up slightly to around 10% and it’s been at that level bumping along now for a few years.
STV: Will we ever get back to around 30%?
SG: An economist recently said the world needs to be aware that large returns are not on the horizon — having said that there are spectacular returns being achieved on the stock market in certain sectors, but these are somewhat short term and it varies.
STV: If we are sitting at 10% to 12% on the upside, how does that compare internationally?
SG: It is a little lower — South Africa has traditionally, on a currency basis, outperformed most countries and even converted into pounds or dollars we’ve done quite well if you go back about five years. Since then it has slipped quite dramatically. Right now a number of countries are sitting at similar figures around 9% to 11%. Canada is doing very well and the USA last year was just on 11%...
STV: That’s the important property market…
SG: Very much so. The UK property market also came back and Australia performed quite well. Most of the hit was taken in Europe, where the debt problems affected the sector quite dramatically.
STV: Looking at segments of the South African market, office was the laggard.
SG: This year, interestingly, the industrial sector performed well and the retail sector continues to perform well. The retail sector was somewhat buoyed by nontraditional areas where investors have found niches in small towns. The office sector is probably most reflective of the economy and that’s probably where vacancies have been most vicious in their impact on returns, at close to 15% across the country.
STV: Are some cities worse than others? Surely the Cape Town CBD is doing well?
SG: The Cape Town CBD has always done well but it’s not doing well at the moment, at around 18% vacant. It’s really a tale of a number of markets. A-grade office properties are doing quite well and are well let, it’s really B-grade and C-grade space that’s vacant and taking strain and there is a bit of that in these CBDs.
STV: Office properties have seen decreasing rentals…
SG: Absolutely. In a tenant’s market like this one has to negotiate and landlords have been pressed from both sides with a massive uptick in operating costs and particularly electricity and security.
STV: What is your outlook on operating costs?
SG: I don’t think this can carry on much longer — inflation on the whole is down along with interest rates, and I can’t see this will continue. Eskom has put through as far as I know the majority of their planned increases so this is about adjusting to a new level where 37c of every rand taken by landlords now goes towards operating costs.
STV: If you’re looking for rising rental income where would that be?
SG: Invest in prime properties that are well tenanted in good areas with quality tenants with strong income streams.
BDLive
