Property research articles

In an inflation environment, the purpose of contractual rental escalation rates is to obviate the need to renegotiate the contractual rental once a year or so. In a hyper-inflation environment, this “or so” could be monthly, of course. Instead, the periodic in-lease rental escalation is an attempt by the parties to the lease to forecast the growth path of market rentals over the duration of the lease. Hence the market escalation rate on rentals is at any one time nothing but a forecast by the market of the probable growth rate of market rentals over the duration of the lease.

It is hard to believe that 15 years ago, the market rated listed property far superior to long bonds, a situation that has since been totally reversed. The question is why?

One of the outstanding features of the new South Africa and the ANC-led government is its stable macro-economic policies, with lower inflation being one of the biggest beneficiaries. This begs the question if the Haylett index is still needed since it was implemented with the intention of compensating contractors for cost fluctuations in times of high inflation.

The nominal returns of institutional property have been in a secular downswing for the last 20 years, and the expectation is that this year the trend will continue. However, institutional property’s average real total return of 5,2% p.a. for the last 25 years still beats the perform-ance of both long-term gilts and cash.

The South African government sold the first inflation-indexed long bond in March 2000. Bids ranged from 10% to 5%, and only a small amount of nearly R500 million of the R189 — maturing in 2013 — was allotted at the cut-off price of 6,5%. The second inflation-linked bond, the R197 (maturing in 2023), was issued in May 2001 and initially traded at a yield of about 5,7%.

Way back in 1978, when I started doing my first tentative property forecasts, life was simple. The forecaster could assume, and bank on, an inflation rate of 15% or so. All metropolitan areas and all property types were growing at a similar rate, or so we assumed, because nobody knew better for want of statistics. There was no decaying node, no crime crisis. There were no sharp hikes in municipal taxes or interest rates. Capitalisation rates were pretty stable. Hence the risk of owning property was low and property was still regarded as an inflation hedge by the investment community. And it was cheap to finance property with loan capital.

After more than a decade of austere monetary policy, South African property players are at long last lowering their profit and growth expectations.

We are all so engrossed in our daily lives that we far too often miss important milestones in our hectic lives. One such a milestone for Johannesburgers is the fast-approaching deadline to object to the new general valuation appraisal of their properties.

Commentators sometimes claim that house prices are about 25% below replacement costs, and that, hence, there is great upside potential for prices.

Two years ago, listed property in SA stood at a discount of about 30% to directly-held real estate. This meant that there was a huge difference between the capitalisation rates of directly-held property on the one hand and the forward dividend yield of listed property on the other. Theoretically, by delisting, property companies could have made a windfall profit.