SOUTH AFRICAN INSTITUTE OF VALUERS "WINTER WARMER" SEMINAR ON FRIDAY 26 JULY 2019
After a few days of persistent rain like Cape Town hasn't experienced for a long time, the clouds cleared to make way for a beautiful Friday morning at The River Club in Observatory for a seminar with fellow valuers.
The Southern Branch of the South African Institute of Valuers (SAIV) put together a great morning with three knowledgeable speakers sharing their experience on varied topics related to the valuation of fixed property.
Our own John van der Spuy, a Fellow of the SAIV (www.saiv.org.za) , was the MC for the morning and did the honours, imparting some levity to the occasion.
John first introduced Phil Barttram from MSCI (www.msci.com), which conducts property research on a global scale, drawn from some 32 countries. The company is listed on the New York Stock Exchange and made a significant contribution to the South African property investment market by purchasing IPD 6 years ago. This has allowed MSCI to offer investment analytics to their clients, a valuable tool to various property professionals as their analytics are based on actual data, not opinions. Thus they calculate the total return a property investment produces as the sum of capital growth and income streams.
Phil highlighted that the South African market currently experiences high volatility in capital growth (88%) and only 12% volatility in income stream. While we all perceive that only South Africa experiences challenges in income returns, it was interesting to hear that income returns are at an all- time low across all countries surveyed where investors are paying more for every Rand they're earning off property investments. On a global scale, industrial property assets (2018) offer the highest returns (13.4%) with retail experiencing the lowest (3.6%). In MSCI's sample of approximately 70 transactions, South Africa came out 'tops' for having the smallest difference between assessed property values and actual transaction values, compared to most other markets. This is certainly encouraging news from a property valuation point of view.
South African property investors have experienced substantial increases in Municipal rates, electricity and water charges but are good at recovering these from tenants, which provides for an interesting statistic of 60% of total rental being the base (contracted rental) rental and 40% reflecting recoveries.
Phil's talk was informative and factual.
John then introduced the well-known economist, Prof Brian Kantor, whose talk was themed "Economic Freedom - or why the SA economy is stagnating." Brian firstly suggested that 'head office' costs account for the big gap between net asset value and market value where fund managers' salaries are calculated, based on capital growth and not earnings growth. He also noted that the SARB's efforts to keep interest rates low, including the most recent decrease, hasn't historically resulted in an increase in property investor sentiment. He suggested that the excessive difference between inflation (4.5%) and bond yields (8.5%) fuels investor thinking that inflation will surely rise, which makes them hesitate when considering property assets as a secure investment. Brian went on to highlight how the Dollar/Euro relationship affects what happens in the South African economy and how we react to a weaker Rand but the crux of his message was that there is insufficient freedom to contract in South Africa, where the aim should be to operate in a fully "free market" economic environment. He suggested that there is too much "Government" interference in our economy with failed SOEs such as Eskom, SAA and SABC becoming a massive debt burden to middle and lower income earners who end up paying for these failings, given that the higher income earners are 'over taxed'.
This situation results in capital flight as these higher earners have the means to invest elsewhere if the South African tax burden becomes too heavy. Brian concluded his informative talk by pointing out that capitalism has resulted in a fivefold increase in global per capita income since 1950 but South Africa's per capita income is stagnating. He attributes this situation to Government overspending and overtaxing.
The final speaker was well known Cape Town property practitioner, Rael Levitt, who has returned to the South African property market, not as an auctioneer but as the brains behind the newly formed Inospace (www.inospace.com).
Inospace is making waves in the Cape Town and Johannesburg property market by investing in 'economically obsolete' industrial properties of 10 000m² or bigger. These are around the CBD periphery and he is reimagining these spaces by incorporating warehousing, storage, offices and communal ablution facilities. They are finding a high demand for such spaces owing to the competitive rentals these spaces can offer compared to more traditional office nodes. Also, these spaces emphasise the importance of the tenant experience by offering month-to-month leases (flexibility), the sharing of bulk expenses such as security and insurance, a communal boardroom, networking events and an on-site manager to attend to all tenant's queries. With the emphasis being on enhancing the tenant experience by incorporating value-add services into these new "business parks" (as Rael refers to them) the fairly recent food truck trend has assisted in providing awesome food options that can change regularly with food trucks from the Mobeats (www.mobeats.co.za) stable occupying common areas within these business parks. The through rentals in these industrial buildings have increased from approximately R40/m² to R90/m² with mainly aesthetic improvements and the creation of smaller spaces being the largest spend in unlocking this higher rental. This is an interesting and innovative business and we look forward to seeing what happens in this space.
The River Club was a great venue for the seminar, serving a fabulous breakfast and great coffee; the perfect spot to mingle with our local valuation colleagues. The informative speakers were a bonus!
Author: Nina Vass