Why invest in commercial property?

11 May 2012

Property buyers and investors looking for solid return on their investments should look to the commercial and industrial sector for good returns.

Property buyers and investors looking for solid return on their investments should look to the commercial and industrial sector for good returns.

According to Grant Lewington, business development executive at Improvon, commercial and industrial property in South Africa is largely held in Johannesburg Stock Exchange (JSE) listed funds, with a small component of the sector held in private hands.

Leiwngton says Improvon is one of the private owners with a blue chip portfolio of industrial properties in some of the country’s most desirable industrial nodes.

As with buying residential property, location is very important when it comes to return on investment over time and a node must have good access and visibility, explains Lewington.

He says thinking about the node’s future changes due to legislative or demographic shifts, and will the node degrade over time are essential questions to ask before investing.

“Investment in South Africa’s property sector is largely dependent on the economic cycle, as this directs where people invest their money.”

While the majority of investment into JSE listed properties is in the retail and commercial property space, the economic climate makes industrial property the most attractive option, he says.

He says the current economy has caused a decline in investment into retail and commercial property.

Industrial property is therefore a good choice because it promises steady growth over time – without factories and warehouses, the country’s economy would certainly collapse, he points out.

It is less complicated and more cost effective to develop and industrial property owners generally work with only one tenant per building – reducing the risk associated with the investment.

“Of course, with the lower risk is a slightly lower reward, as is the case with any investment, but the reduction in risk is well worth it,” he says.

The Barrow Group reports that the commercial sector has been developing into two distinct categories - AAA prime grade and A grade and below.

While the latter remains under pressure, there is increasing demand for AAA grade office space in prime locations, despite the economic downturn.

The South African Property Owners Association (Sapoa) and Investment Property Databank (IPD) office survey shows that the national average vacancy rate is 1.7 percent for prime grade commercial property.

This reflects the strong demand for top quality office space in key locations and is in stark contrast to lower grade property showing vacancy rates of 8.7 percent and higher, says the company.

IPD notes that commercial property outperformed equities and bonds in South Africa in recent years.

The overall commercial real estate sector achieved a 10.4 percent return in 2011 while the office space sector realised a return of 11.2 percent with 1.3 percent capital growth and a 9.7 percent income return.

This research was based on 2 017 properties with a capital value of R204.8 billion.

Jake Hoddinott of Barrow Properties, a division of the Barrow Group, points out that the sample size included all grades of commercial property in all areas, however, commercial properties in prime locations would have outperformed these figures.

Sectional title developments in the AAA class have shown consistently solid capital appreciation, proving that even in a slump, quality sells.

IPD notes that commercial property outperformed equities and bonds in South Africa in recent years. The overall commercial real estate sector achieved a 10.4 percent in 2011, while the office space sector realised a return of 11.2 percent with 1.3 percent capital growth and a 9.7 percent income return.

He says one of their developments located on Katherine & West in Sandton has half of its offices sold to companies and private investors.

The development valued at R650 million was launched in September 2011.

This development is located 50m from the Sandton Gautrain Station and near the JSE and the area has attracted top corporates such as Alexander Forbes and Ernst & Young, both of which are set to move into new head offices in the vicinity.

Hoddinott says another development is the highly successful 1 & 3 Melrose Boulevard in Melrose Arch, comprising 60 sectional title units over 21 000 square metres.

“Due to the property’s location, people are prepared to pay a premium and the development has shown higher returns than any of our developments.”

He explains that the Gautrain has resulted in the creation of business hubs around the stations with nodes such as Sandton and Rosebank resembling those of First World cities where commercial property is highly concentrated.

It is in these areas that demand is highest for limited space and buildings are forced to grow upwards.

Barrow says they are seeing more companies in Gauteng establishing themselves near arterial roads with convenient access to highways.

There is also a move towards ‘green’ and energy-efficient buildings, driven primarily by the escalating price of electricity and municipal rates as well as growing awareness for environmental sustainability, say Hoddinott.

Barrow’s current projects include Katherine & West, a 21 000 square metre sectional title office development next to the Gautrain Station in Sandton, Corner Main and Culross on Main developments in Bryanston and Greenstone Hill Office Park in Modderfontein.

In Illovo, Johannesburg, Intaprop is developing an office property, 8 Melville with the 2 400 square metre first phase scheduled for completion in December 2012.

It is fully let to RMB Corvest, and the double storey, energy-efficient offices has expansion capacity for a further 800 square metres.

In Illovo, Johannesburg, Intaprop is developing an office property, 8 Melville with the 2 400 square metre first phase scheduled for completion in December 2012.

Designed by Stauch Vorster architects, this property is striving to achieve a four-star green status for this prime corporate office development.

The building features the green technology of a VRV system, which stands for "variable refrigerant volume". 

In principle this system is an extremely efficient, reliable, energy saving way to heat and cool buildings of this type with minimum installation time or disruption, says Intaprop director, Hugo Stroud. 

The property also uses state-of-the-art, latest generation low-energy lighting installations.

From energy-efficient lights to motion sensing technology, this green building shines the light on sustainability. 

It is designed to conserve water, with rainwater harvesting and grey water usage, he says.

8 Melville is the latest addition to the established office node, Illovo Boulevard, which provides a low-rise park-like business environment.

The second phase of 8 Melville will be demand-driven and is ideally suited to any corporate that prizes sustainable business, energy efficiency and an excellent working environment for its people, says Stroud.

According to the latest Jones Lange La Salle Johannesburg Property Overview Q1 2012 report, the commercial market is beginning to favour landlords in the prime office properties as they are starting to achieve asking gross rentals and reduced vacancies, albeit limited speculative completions.

Click here to read the article.

Illovo’s prime office space commands the highest rentals of R200 per square metre, while A office grade in this node have rentals ranging between R115 and R125 per square metre, according to the Sapoa/IPD report.

Read the article here.

In Century City, the Business Centre Group is developing a new 4 000 square metre office block at a cost of R85 million, scheduled for completion in June 2013.  

In Century City, the Business Centre Group is developing a new 4 000 square metre office block at a cost of R85 million, scheduled for completion in June 2013.

The group provides furnished, serviced offices to businesses of various sizes in Gauteng and KwaZulu-Natal and this will be the first Business Centre in Cape Town.

The four storey property designed by Vivid Architects is being developed as a joint venture between The Business Centre and the Rabie Property Group.

Business Centre Group chief executive officer, Andrew Utterson, says the Cape Town offices would bring to six the number of business centres in the group.

Together this would provide a combined Gross Lettable Area of 22 500 square metres and 740 individual offices making them the single largest serviced office company in South Africa.

The group was launched in 2005 by the three founders and current partners, Andrew Utterson, Travers Hathrill, and Ceri James, currently operates three Business Centres in Gauteng (Bryanston, Rivonia, and Fourways) and one in Umhlanga and is set to open a fourth Business Centre in Broadacres, Gauteng in November this year.

Utterson says one of the key requirements for any Business Centre, is that it is situated in a prime location, with easy access, to all major routes, restaurants, and shopping facilities.

Technology underpins the backbone of The Business Centre, and supports our expanding customer base, he says.

He adds that the Century City Business Centre would be fully serviced and is ideal for any startup business, SME, or national business looking to avoid massive start up and operational costs, while expanding their operating footprint.- Denise Mhlanga

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