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Jun 18, 2008:
OFFICE and industrial property rentals could soften if SA’s economic slowdown lasts longer than the market generally expects, industry experts said yesterday.
The office and industrial property markets are steaming ahead at the moment with retail property feeling most of the pain as a reduction in consumer demand causes retail sales to drop .
Re-Connect director Ian Anderson said yesterday that the office and industrial sectors were “ holding up based on anecdotal evidence from the market”.
He said: “New space continues to be taken up by tenants and market rentals continue to rise in most areas.”
Anderson said the issue now was how long the economic slowdown would last because this “would affect demand”.
“A prolonged slowdown would certainly affect demand for new (office and industrial) space and even though there was no new supply coming on stream, the reduction in demand may drive rentals lower,” said Anderson.
He said the market’s general view was that the economic slowdown would be relatively short- lived and that office and industrial property rentals would not “fall from current levels”.
“Personally, given how high inflation presently is and the length of time it is likely to stay above the Reserve Bank’s target, interest rates will remain higher for longer and as a result the economic slowdown could last well into 2010,” said Anderson.
Old Mutual Investment Group SA’s head of quoted property, Len van Niekerk, said there seemed to be a belief in the market that retail property was the most vulnerable to the economic climate, and that offices and industrial properties were “immune”.
“Although retail property is vulnerable to an increase in interest rates, it would be unreasonable not to expect the office and industrial property markets to show signs of strain on the back of higher interest rates.”
He said higher interest rates slowed the economy and that this affected consumers and businesses, who occupied space in the office and industrial markets.
Pace Property Group MD David Green was more optimistic about office and industrial prospects.
Green said the supply of new office and industrial space had dropped as a result of higher interest rates, building costs and energy issues.
“As a result, the demand for office and industrial stock in the market in general exceeds supply. That should underpin the value of these two asset classes going forward,” said Green.
What was true was that the prices of lower-grade industrial and office properties would drop as the market saw capitalisation rates increasing by 1% or more in line with interest rate increases.
“Quality office and industrial prices are, however, holding up well as the investor demand for these products remains strong.”