Property prices will continue to grow, but at a slower rate

This week's decision by the South African Reserve Bank to leave interest rates unchanged will not be detrimental for either residential or listed property, experts say.

Your home will continue to rise in value this year, but not at the rapid pace of the past few years. Listed property, however, is about to boom.

Saul Geffen, the managing director of Mortgage SA, says a modest change in interest rates - either up or down - is unlikely to affect property prices, because most consumers recognise that South Africa has reached the bottom of the interest rate cycle and are factoring in a small future increase in rates when they buy.

The 32 percent increase in house prices experienced during 2004 is not expected to be repeated this year, Jacques du Toit, the senior economist at Absa, says. However, a sharp downward correction is not likely. The month-on-month growth in house prices has been declining since January last year, he says.

Geffen believes property prices will increase by a more sustainable 15 percent during 2005.

Factors other than interest rates are underpinning the property market, he says. These factors include innovative homeloan packages, sound economic fundamentals and the demand for property by the emerging black middle class.

While the boom in residential property is almost over, the best is still to come for listed property, Colin Young, the head of the listed property sector at Old Mutual Properties, says.

Young says the decision to leave interest rates unchanged is "not a train smash" for the listed property sector. Two main factors drive returns from listed property, Young says. These are interest rates and the commercial property cycle, which is influenced by the supply and demand for commercial property space and town planning issues. Commercial property consists of office, retail and industrial property.

Listed property has produced returns of 40 percent over the past two years, Young says. The excellent returns can be largely attributed to declining interest rates, which lower the cost of borrowing and allow companies to make bigger distributions to their shareholders. For every one-percentage point interest rate drop, investors can expect a 10-percentage point growth in share prices.

Although interest rates are expected to continue to decline over the next few years, Young says, growth in the share prices of listed property com-panies is expected to be driven by fundamentals in the commercial property sector rather than interest rates.

The market for office property is still in the doldrums, Young says. The market is driven by the demand for office space by corporates. The country's economic growth rate has not been sufficient for the office market to pick up, he says. However, the retail and industrial markets are enjoying exceptional growth.

Significant construction projects are under way in the retail sector, and the owners of retail property are signing leases with escalation clauses that provide for rent increases that are well above inflation, he says.

Most listed property companies hold industrial property that is let to companies involved in distribution rather than manufacturing.

The volume of retail sales in 2004 was double that of 2003. Strong retail sales boost the performance of the distribution sector.

The continued strong demand for retail goods is very positive for the property cycle, Young says.

If you want to benefit from the expected boom in commercial property, you should invest in property unit trusts that are exposed to retail and industrial property, he says.