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Investment in residential doesn’t match the returns

Property investors looking for the best possible returns on their investments should steer their money towards commercial
property as opposed to residential, particularly in Durban’s highgrowth commercial areas. 
This, says Rode & Associates’ Erwin Rode, is because generally speaking, mid-size, mid-priced residential properties sell at income yields that are 2% to 4% lower than those of Grade A commercial and industrial properties. 
This implies that the investor in residential properties gets less of an initial income stream for the same capital investment than from non-residential properties. 
“For example, a house worth about R1 million would return a net income yield in the first year of about 6% compared with a prime industrial property that would sell at 9% to 10%. Put differently, residential properties are more expensive than commercial and industrial properties.” Regarding Durban investments specifically, Rode says the latest statistics show no growth in house prices there. Also, according to Rode’s report, flat vacancies were at 6.5%, slightly higher than the country average of 5%, but rents still grew at 8% year on year.  

“This may just indicate a swing to renting in the wake of increasing unaffordability of home ownership.” 
The industrial sector has been the best performing sub-asset class. Picture: Francesco Patrinostro
Reflecting a lacklustre economy, Rode says office rents in La Lucia Ridge and Umhlanga Ridge have declined slightly over the past year, although the oversupply is not serious. 

“The Berea office node seems to be making a comeback… The industrial property market had rental growth of 3.5%, which is par for the course for South Africa at this stage of the cycle.

“Property development activity in Durban is in the north, and that is where the best capital growth can be expected over the next decade and longer. But, in the long run, don’t expect capital growth higher than the growth in replacement costs (building-construction costs) less depreciation through ageing.”

Over the long term, retail has been the best performing sub-asset class in the country, says Naeem Tilly, an analyst at Catalyst Fund Managers. The sector benefited from the emergence of the middle-income consumer and increased social welfare spend.

“In the near term, the retail sector is contending with anaemic retail spending and, as a result, a lower level of store growth by national and international retailers. While reduced political tension should boost consumer confidence, the expected increase in both direct and indirect taxes in next month’s budget could dampen spending.”

Agreeing that the industrial sector has been the best performing sub-asset class, Tilly says tenants are seeking modern warehousing due to advancements in the trade, wholesale and logistics sector.

“While e-commerce is a small component of demand in South Africa, the accelerating shift to online retail will lead to demand for warehousing.” 
The short-term outlook for the office sector, he agrees, “remains muted”.

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