Commercial property under pressure

The outlook for the commercial property market is bleak with developers and bankers taking a far more cautious view of this sector says property economist Francois Viruly of the University of the Witwatersrand’s School of Construction Economics and Management.

He warns that there has been a dramatic drop in the number of developments underway and even existing projects are being reassessed to avoid adding to the widespread over-supply of office accommodation.

“Office vacancy rates have increased since last year and this picture is unlikely to change before 2011 or perhaps 2012,” he warns. “Increased spending in the retail sector might have an impact on reducing vacancy rates in retail shopping centres in the short term,” he claims.

Hyprop Investment’s Mike Rodel says that the time is ripe to get particularly good rental deals from agents or developers who are keen to boost occupancy levels. Rodel says that Hyprop is expecting national retail sales growth of between 7% and 10% over the next two years with regional centres growing by up to 12%.

Rodel says that the margin of operating costs to gross rentals has continued to rise and increased from 30% two years ago to 40% now and high vacancy rates have made it difficult for owners to pass the rising costs on to the tenants.

Viruly warns that the biggest difficulty facing developers is to keep the operating costs in retail centres under control as the operating margins are too high at the moment and need to be brought back under control.

“There are likely to be some retail opportunities that do arise in the short term – such as for retail space on Gautrain stations – but the retail property market will remain under pressure until at least the second half of next year,” says Viruly.

Broll says that while there has been pressure on the retail and office market, there are still some impressive deals being done. The company recently sold two investment properties in Cape Town.

The first, 43 Bloulelie Crescent in Plattekloof sold for R13,5-million and 5 Ravenscraig Road in Woodstock sold for R33,75-million.

The Bloulelie Crescent property is let out to medical professionals while the Ravenscraig Road building is home to a large printing firm in a traditional industrial area.

According to Sean Berowsky, national property investment specialist at Broll, the interest levels from investment buyers has remained high, particularly for prime commercial and industrial properties.

He concedes that transactions have been restricted by the limited negotiability of sellers because of prevailing low interest rates and the limited stock that’s available.

“The difficult funding environment facing buyers means that there must be a substantial injection of equity,” he says. “Well-tenanted properties with good income streams are still easy to sell whereas buildings with high vacancy rates are not attracting much interest at all,” he adds.