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Lower income yields from residential purchases

Property investors looking for the best
possible returns on their investments
should steer their money towards commercial
property as opposed to residential
– even in Cape Town, where house-price
growth is still close to double digits.

This, according to 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.

He says this implies the investor in residential properties gets a smaller initial income stream for the same capital investment than from non-residential properties.

“For example, a house worth about R1million 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 Cape Town investments specifically, Rode says house prices are still growing at an “astonishing rate of close to double digits”. This is “against the background of a national economy in dire straits and a water scarcity that is heading for a catastrophic denouement”.

Although the popular explanation for the super performance is semigration from the rest of the country, Rode says the question is how long the Cape Town economy and house prices will be able to “swim against the flow”. Reflecting the buoyancy of the residential market, Rode says flat vacancies are at a low 2.2% in Cape Town. However, flat rentals, which have boomed in recent times, have stopped growing due to affordability constraints.

“Industrial properties in the Cape Peninsula are on an even keel and industrially zoned land is in great demand, with developers battling to bring enough new supply to the market. The most popular locations are along the R300, N1 and N7.”

However, the same cannot be said about offices, Rode says, as there is a “serious amount” of unlet new space heading for the CBD market.

Over the long term, retail has been the best-performing sub-asset class in South Africa, 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.

Industrial property and industrial-zoned land is in great demand. Picture: Francesco Patrinostro

“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 help consumer confidence, the expected increase in both direct and indirect taxes in the upcoming budget could dampen spending.”

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

“While e-commerce remains 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” due to a high level of oversupply and low pre-let levels on new developments. Business confidence remains low and the services sector continues to consolidate space.

“The inward migration to Cape Town has resulted in better performance across all commercial property types. There will inevitably be some short term impact of the drought, specifically in the hotel and leisure and retail sectors.”

Tony Ketcher, Seeff regional general manager for the Cape region, says Cape residential property is regarded as some of the best to invest in now. Data from FNB shows the Western Cape property market remains the best performer in the country with 50.4% cumulative growth over the past five years.

“FNB reports that Cape Town metro prices grew at 9.4% year-on-year in December, faster than the 9% of Q3:2017.”

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