Opportunity in the Commercial and Industrial Property Sector as Values are Expected to Decrease in t
Category From the Director's Desk
The recent sharp rise in the prime interest rate to 11.75%, as well as an economy that is constantly on the back foot and facing countless challenges including the uncertainty around the 2024 general elections, is expected to decrease the values of commercial and industrial (C&I) properties over the short to medium term.
C&I property values are, generally speaking, a function of the net income they earn (or have the ability to earn) and a suitable risk-adjusted capitalization rate ("cap rate") also known as the property yield. The cap rate for a specific property is the income return that an investor would be willing to receive for buying such a property, considering all of the various associated risks (tenant default risk, condition of the property and maintenance risks, political risk, economic risks, etc). Therefore, simply put, the riskier the investment or the investment environment is, the higher return the investor would require and the less they would be willing to pay for a property.
As investing in South Africa continually becomes riskier (for many reasons that we don't need to remind you of) and investor risk thresholds seem to be reaching tipping point, there will continue to be very strong downward pressure on most C&I property values over the short to medium term.
It must be noted that this is a broad conclusion to reach, however you may find that there are certain areas or sectors where commercial and industrial property values increase nicely over this period. An example of this is the industrial property market in Durban, where the demand for good industrial and warehousing space far outweighs the supply and continues to drive rentals and values up.
Having painted a rather bleak picture, if you do have a higher risk appetite, an environment like this will present many opportunities to buy properties at a 'discount', and if you take a long-term view, with a strong property management partner, you may be able to achieve decent levels of return and growth in value.
A positive to take is that the top of the interest rate cycle seems to be close and there appears to be some light at the end of our electricity crises as the move to renewables gains considerable momentum, which will go a long way to stabilizing our economy.
For expert advice on your C&I property requirements in Durban, be sure to contact the Maxprop brokerage team.1410
Author: Maxprop