viruly-blog

2014 Design capital ( Cape Town )

Tue, 24 Apr 2012 14:38:55 +0100

This morning I attended a SAPOA breakfast in Cape Town. One of the speakers was Bulelwa Makalimia Ngewana of the the Cape Town Partnership . She gave an interesting synposis of the Cape Town bid to become the design capital capital in 2014. What was interesting is that the Cape Town Bid revolves around people and design , unlike what the other competitors - namely Bilbao and Dublin are saying . And she was right in underlining that we often pay insufficient attention to design when developing infrastructure and housing - especially when providing infrastructure and housing for the poor. While it can be argued that winning such a bid is not critical to Cape Town and that we have other priorities , there is a strong argument to suggest that it would play an important role in bringing home the view that good urban design improves lives . I am sure that creating well designed suburbs plays a role in creating happier places - and if that is so, winning the 2014 race is important .

Have a look at the website. http://www.capetown2014.co.za/

Francois

Investment property data Bank ( IPD )

Tue, 10 Apr 2012 18:10:09 +0100

The Property Investment data bank ( IPD ) has released the returns for the South African property Sector in 2011. It shows that total returns have declined to 10.5%, compared to the the 13.3% rcorded in 2010. The industrial sector continues to outperform the market with a return of 11.9%. What is possibly of greater importance is that the difference in returns between the sectors has become marginal with the industrial , office and retail sectors recording .11,9%, 11.2% and 10.1% respectively. For the asset manager it means that greater focus needs to be placed on the effective management of properties. The outperforming asset manager will not so much be the one that chooses the right sector but rather the one that identifies the correct properties and "sweats" these assets themost effciciently . According to the IPD, operating costs increased by 17% in 2011 , whcih is well above the inflation rate of some 5% in 2011. It is becoming clear that containing the rise in operating costs will remain the most important issue for the sector in the years to come.

South African Reserve Bank ( Quarterly)

Wed, 14 Sep 2011 19:37:55 +0100

The latest Soouth African Reserve bank bulletin has provided a gloomy picture of the SA Economy. Consumer expenditure is slowing and the construction sector is under significant pressure. Numerous government driven prohjects are not seeing the light. As a result it is becoming increasingly probable that the SA Reserve Bank will leave interest rate sunchanged in the short run. The possibility of a decline in interest rates is also becoming a possibility by year end. Generally these conditions do not bode well for the SA property market and the retail sector in particular.

PROPERTY IN A DOUBLE DIGIT VACANCY RATE OFFICE ENVIRONMENT

Thu, 21 Oct 2010 11:02:31 +0100

The vacancy rate is probably the closest that the property market has to a coincident indicator. The recently published SAPOA vacancy rates suggest that the South African office market remains weak and that rentals will remain under pressure in 2010.

Of the twenty Johannesburg nodes measured by the SAPOA only six nodes showed an improvement in vacancy rates in the past quarter. These include Bedforview, Constantia Kloof, Houghton, Melrose and Randburg. But in general the conditions in decentralised nodes worsened over the past two quarters. In Sandton, prime or “A “grade vacancy rates increased from 5.9% a year ago to the present 10.2%. The picture is little better in for instance Rosebank which has seen “A” grade vacancy rates rise from 7.7% a year ago to the present 20.2%. In Cape Town, vacancy rates in decentralised nodes have followed a similar trend. Century City and Claremont are recording vacancy rates of 14, 6% and 17% respectively. Conditions seem to be better in Durban and Pretoria which have seen lower levels speculative development. It is worth underlining that grade properties in South African CBD’s are showing lower vacancies than that seen in decentralised nodes. The vacancy rates for a grade space in the Johannesburg, Cape Town and Pretoria CBDs are 6.6%, 10.3% and 2.4%. The Durban CBD however seems to be losing momentum with a grade vacancy rates rising to 18.4%.

The situation in the B grade office market seems to be somewhat better. For instance the Sandton B grade vacancy rate is lower than a year ago, and in Claremont the B grade vacancy rate has declined from 9.2% to 4.0%. This possibly suggests that under the present economic environment, tenants could have decided to opt for more affordable lesser quality space.

In attempting to understand the implications of these figures it should be underlined that the “natural” or equilibrium vacancy rate for the South African office market is approximately 8%. International studies suggest that rentals generally fail to rise in real terms when vacancy rates breach their natural rates. It implies that under present market conditions it is unlikely that rental escalations will be significant in the short term – namely much more than the inflation rate of 4%.

The reduction in building activity should stabilise vacancy rates in the next few months and it is likely that most decentralised nodes will see vacancy rates decline during the course of 2011.

Francois viruly

A YOUTHFUL PROPERTY MARKET ON STEROIDS

Wed, 06 Oct 2010 11:02:01 +0100

The Dubai property has a seen a decade of phenomenal growth, with the amount of commercial and residential space more than doubling every year. Easy finance, the availability of land, and a conducive regulatory environment provided the steroids for a property boom. But, things changed in 2009. Approximately half the planned projects have been put on hold and estimates suggest that there is sufficient stock to meet take-up for the next decade.

While this slow down can be blamed on the global credit crunch some of the blame should also be placed on the regulatory environment in which the Dubai property market functions. Ultimately property markets are driven by economic fundamentals and the economic base from which the demand for space arises. Economic growth and demographics affect demand for space, which developers and investors respond to. With appropriate research these players attempt to match supply and demand, and when this is not achieved values either rise or fall.

The Dubai property residential market has primarily been underpinned by speculative transactions that have little to do with occupancy. The process went as follows; you access land and sell it to a developer at an attractive margin, the developer sells units to investors ( often off-plan) and with little equity makes a considerable return. The investor, who acquires a residential unit, in turn sells it to the next investor making an attractive return. With investors generally exceeding available units this process carries on with investors paying little attention to fundamentals and the valuation of properties. Often investors merely signed an option and resold the units on completion – the process requiring a minimal amount of equity. With the global crisis negatively affecting the asset base of potential investors, and developers finding it difficult to secure development finance, the speculative bubble started to deflate in late 2008 and property values decline during the course of 2009 and 2010.This decline was not so much the result of rising vacancy rates (many units had never been occupied in any case), but rather the drying up of investors and debt financing. Residential property values have declined in the region of 40% - 50% in the past year.

This speculative market was also encouraged by the lax regulatory environment. It is likely that the market will re-emerge with the rules of the game having changed somewhat (as has occurred in financial markets across the world). Planning regulations will probably tighten up, selling off plan could become more difficult, and the focus will be on ensuring that an appropriate relationship is maintained between investment demand and the occupation of space. For instance , in China the property boom has to some degree been managed by increasing deposit requirements and reducing loan to value ratios.

While the supply of space in the Dubai property market has slowed, a number of developments that are presently underway will continue to provide space in an already oversupplied market. As investors and developers will attempt to offload these developments, the impact of the extra units on the values of existing properties could be considerable.

Although the short term investment risks associated with the Dubai property market remain high, there is little doubt that long term opportunities are considerable. This is a market that will mature with time , losing the characteristics often associated with youth.

Viruly Consulting

Johanneburg Inner City Retail Rentals At R2'000 sqm

Sat, 25 Sep 2010 17:22:21 +0100

If you think that rentals are high in the standard South African Shopping centre , consider retail rentals on the corner of Jeppe Street and Delvers Street in the Johannesburg CBD .

A recent workgroup co-ordinated by Hannah Le Roux and sponsored by the Goethe Institute considered the dynamics around certain buildings in the Johannesburg inner city . What is interesting about these buildings is that they are primarily let to Ethiopian retailers – in a sense creating an inner city Ethiopian retailing precinct. These buildings are also a clear illustration that there is scope to convert Johannesburg inner city office space into high rent yielding multi storey retail space. This provides an interesting alternative to the conversion office space into residential space.

While these multi –storey retail buildings may not provide the finishes found in the average South African Shopping centre, they do provide a tenant mix , and rentals that suburban shopping centre investors would be highly satisfied with . The Jo’burg Mall , situated on the corner of Delvers Street and Jeppe Street offers a one-stop retailing experience that includes, food and clothing stores, restaurants, coffee shops, hair dressers and internet café’s.

For the retailer, these properties also provide a wide variety of letting options. While some stores are a mere two square metres , the average store seem to be in the region of twenty to thirty sqm . The point is that the space is reflective of market needs – generally a family run store in this particular environment would find it difficult to stock the standard one hundred sqm store. Moreover by focussing on a few buildings , Ethiopian retailers are reaping the advantages associated with the clustering of economic activity . It includes the creation of an environment in which economic activity can happen in safety.

These buildings illustrate that a built environment that responds to community needs and market dynamics has a role to play in stimulating economic activity and urban regeneration – urban decay largely sets in when this match has withered away . The high rentals experienced in these converted properties suggest that demand is well in excess of supply, and It is likely that with time investors will recognise the investment opportunity and start supplying the market . The pace of redevelopment will also be affected by the ability that city authorities have in timeously identifying and supporting community and market trends.

Francois Viruly

Does the interest rate cut matter for the South African property market ?

Tue, 21 Sep 2010 17:07:52 +0100

It is unlikely that the decision by the South African Reserve bank to lower the repo rate by 50 basis point will have a significant impact on the South African commercial property sector. Recent residential property data provided by ABSA and FNB suggest that the rise in residential values has stalled and that the sector could be experience a double dip.The commercial property sector continues to suffer from high vacancy rates, and property owners are finding it difficult to secure rental increases that surpass the inflation rate. The recently published 3.7% inflation rate will have played a role in the reserve's bank decision, yet there is growing evidence that operating costs in the commercial sector are growing at a rate well in excess of this figure. This will continue to place negative pressure on net rentals and property values. It is unlikely that the sector will , in the medium term, see a significant further lowering in interest rates. For now, prospects for the South African Property sector will largely be determined by whether investors will be sensitive to lower interest rates.

Francois Viruly
Viruly Consulting

The SA housing market is entering a double dip

Tue, 21 Sep 2010 17:08:36 +0100

There are strong indications that the South African housing market is entering a douple dip. FNB has just released its August 2010 House price index whcih indicates that the year-on -year growth in housing prices has declined to 7.2% compared to 10.1% in July. The report also makes the important point that while the nominal increase is weakening , property prices are showing strong real growth - but that reflects a declining inflation rate scenario rather than the strength of the property market. The recent trend is also a reflection of the fact that the 500 basis point decline in the interest rates experienced in 2009 has now worked through the system. It is also unlikely that a possible decline in interest rates in the near future will not have a material impact on the market as the balance sheets of South African households remains weak. Recent market reports also suggest that the rental market is improving . This may indicate that potential owners are resorting to renting instead. In all , it is likely that the residential property market will remain weak for the rest of 2010.

Prof Francois Viruly

Viruly Consulting

Decline in interest rates

Tue, 21 Sep 2010 17:09:23 +0100

There are clear indications that SA interest rates will start to decline. This bodes well for the SA property market in general. In particular it should encourage retail expenditure. We remain of the view that the retail sector will come ouot of recession first, followed by the industrial and and office sectors.

Francois