From the desk of Norbert Sasse

Investors can expect distribution growth from the sector in 2013 to average between 5% and 8%. Listed property total returns should be between 10% and 16%. While still positive, this is well below the total returns of 2012. With tougher market conditions overall, companies that can manage vacancies and costs are better positioned to deliver performance for investors. Sectoral portfolio composition will also influence performance. Weak demand will continue in the office sector. However, retail and industrial property will perform well off a base of low vacancies that should remain stable. Expect lots of corporate activity from the sector in 2013. Especially smaller funds merging to gain critical mass and taking a defensive position in a market where larger funds are pursing aggressive acquisition strategies. Property acquisitions will remain robust given low interest rates, the forward yield of listed property sector, and the availability and affordability of funding. Newer funds and funds with ambitions to list will be keen to snatch up assets from the sector’s larger players. While interest rates remain low, pricing yields on the listed property sector will continue to be low, which is good for capital raisings. Institutional investors continue to show good appetite for the sector. In April 2013 REIT (Real Estate Investment Trust) legislation will be introduced in South Africa. Spearheaded by the PLSA for its positive impacts on the sector, this legislation will provide tax certainty and align South Africa with global investment structures and established REIT markets like the US, Australia, Hong Kong, Singapore and the UK. While adopting this best-of-breed international investment structure, the sector will also look beyond South African borders for growth. Given the local market is becoming increasingly competitive with more listed property funds, some will start focusing more on opportunities outside South Africa with property acquisition and developments. However, investment into developed markets will be tougher with the current Rand weakness. Also, most of these property markets rerated substantially, driving yields significantly below South Africa’s. Investments in the US, UK and Europe are likely to be dilutive in most cases, but there are still some opportunities in Australia. Listed property companies are also playing a larger role in new property development in South Africa. This development will favour mixed-use, retail and industrial development in the present market. The rush of retail developments in smaller towns in recent years will slow as retailers become more selective about new stores. In 2013, there could be an improvement in funding from the banking sector driven by recent changes to some of the Basel 3 requirements. While the sector continues seek new ways of growing and new income streams, it is becoming increasingly focused on reducing the costs of occupancy for tenants. High operating costs increase tenants’ cost of doing business, putting pressure on their ability to pay rentals. This also means lower economic growth and lower demand for space. Introducing energy efficient measures to reduce energy consumption is one way property owners are giving occupants added benefit, without charging more fees. Companies are becoming smarter and more competitive with their tenant services and finding ways to differentiate their space besides building quality and location. Like other sectors in the South African economy, a further downgrade of South Africa by rating agencies is a threat to listed property’s performance. This would weaken the Rand with knock-on effects for the domestic banking and bond markets. The resultant spike in inflation and interest rates would lower listed property prices. The growing labour market tensions are also bad for business, and have an unsettling potential to impact the commercial property space.