As the party ends for residential property (Cover Story August 11), things in the commercial property market start swinging.
There's already too much demand, but every day more investors inundate commercial estate agents with pleas for properties that might be available.
"Everybody's a buyer," says Fran Teagle, commercial director of Broll, SA's biggest commercial broker. "No-one wants to rent anymore."
She says demand seemed to pull back a little with the first interest rate increase by the Reserve Bank in May, but it has not affected the capitalisation rate - and therefore the value - at which property deals are being struck. "Everybody's after the same properties," she adds.
There are historic reasons for the shortage of property. In the early 1970s, SA property dislocated from the real-estate trends in the rest of the world. Economic sanctions against apartheid slowed the economy.
Rising interest rates following the first oil crisis in 1973 put more than a score of listed property developers out of business and helped trigger a stagnant, high-inflation economy. The dead hand of institutional investors, who were looking in a sanctioned hothouse economy for a place to park their money, took over the property market.
The rate of property development compared with, say, the population or GDP growth sagged well below comparative overseas economies. Real rents fell during the 1980s, dragging investment returns with them. SA property lost its entrepreneurial spirit.
There was a pause after the democratic elections of 1994 as investors weighed up the scene. Government allowed institutions to invest offshore. They began to sell their property and private investors moved in as solid buyers for the first time in decades. The economy also started improving and with it demand for office, factory, warehouse and retail space.
But it was limited by a lack of confidence and slowing municipal approval processes for new commercial land. The speed of approvals was the first challenge for the burgeoning property market.
But it was after interest rate declines in 2002 coincided with growing confidence and rising economic activity that demand really took off. This demand tends to follow GDP growth. If GDP grows by 5% over the next 10 years, office use will grow by an average 650 000 m²/year over that time, the equivalent of half of Sandton's CBD district each year. Demand for factories and warehouses will grow at about the same pace.
It has taken a few years of 3%-4% growth to swallow up virtually all the empty space in SA. That's where the SA property market is now.
Developers who started building new space early will be able to meet the frenzied demand by next year at prices that could be 70% higher then than they are today, says Erwin Rode of property consultants Rode & Associates.
But new problems have been revealed - a shortage of building and professional skills.
The construction industry is preparing for huge government infrastructure programmes, the building of stadiums for the 2010 World Cup and Gautrain will require many of SA's engineers.
Rocketing building costs alone will justify constant double-digit rent increases for the foreseeable future.
But the shortage of investment properties is pushing down capitalisation rates - the first-year return that investors are prepared to buy the property at - pushing up prices and putting further upward pressure on rents. "I believe rents will double in the next two years," says Stuart Chait, Cape Town property dealmaker and partner in Johannesburg's Melrose Arch.
Teagle says rents in top-grade buildings with major blue-chip tenants will rise more slowly from the present R125/m² in Sandton to perhaps R150/m² by the end of next year "because that's how that end of the market works".
But refurbished B grade office space has already risen from R65/m² to R95/m² this year, she adds.
Whatever the pace of rent rises, "there are no investment bargains in SA commercial property anymore", says Pace Property Group CEO David Green.
He confirms that by August the huge investment demand had been unaffected by this year's two interest rate rises and will not slow if Reserve Bank governor Tito Mboweni announces further rate rises in October and December.
"The main demand comes from institutions, listed funds and large investors after the best properties," says Green.
"They are pushing down yields for those properties, which in turn depresses yields and lifts the prices of the next quality level of properties and so on down the line.
"So investors are buying properties fully priced. And there are no soft deals. If you want to get into the market, you must have the cash available for transfer and bond registration costs, six months of rates to get a municipal clearance for transfer, and, of course, a deposit of between 10% and 25% of the property.
"Only people with liquidity are able to deal in this market."
This is not a market for amateur investors, says Green.
"You are competing with buyers - acting for themselves or institutions - with a minimum of 10 years' experience. They have knowledge and they know they must research the market in detail before embarking on a new purchase."
You can go into the market with another investor who has the experience, says Nedbank Corporate CEO Frank Berkeley.
"But usually you will get the experience and he will get the money."
And having bought a fully priced property, an investor can look forward to rapid rental growth over the next decade.
With such rental growth, you would think tenants were getting the short straw when it comes to opportunities. The cost of accommodation could double as soon as their leases end. Or they might have to tie up long leases to limit the damage, but pay for it in a costly lack of flexibility as they expand. But you couldn't be more wrong. (See next story.)
