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Friday Oct 12, 2018

Retail has been the hottest property sector

The Retail property sector appears to have outperformed the other major property sectors over the past two to three decades, according to FNB.

John Loos, a property sector strategist at FNB Commercial Property Finance, said although estimates of average house price growth were not exactly comparable because they were done on a per unit instead of on a per square metre basis, it appeared retail property had even outperformed residential property over the past two decades.

Loos added that Morgan Stanley Capital International data for the performance of the retail sector for the entire 22-year period from 1996 to last year indicated it appeared to have run far stronger over this period than other major property sectors.

He said the average capital value per square metre for retail property appeared to have risen by a massive 877.4 percent between 1996 and last year.

Loos said further that FNB’s long- term house price index had inflated by 670 percent, with the residential market having run neck and neck with retail capital growth up to 2008 but underperforming thereafter.

By comparison, the cumulative increase by the industrial and warehouse sector was a more modest 544.8 percent and office space 523.0 percent in the same period, he said.

Loos added that after adjustment to take into account the impact of inflation, the increase in the average capital value per square metre for retail property was “an impressive” 117.3 percent between 1996 and last year, residential 71.4 percent, industrial property 43.3 percent and office space 38.5 percent.

He said retail property also experienced a cumulative capital growth net of capital expenditure of 342.5 percent between 1996 and last year compared with 149.8 percent for industrial property and 78.1 percent for office space.

Loos added that the affordability of retail property had deteriorated signif- icantly compared with the other two major commercial property classes, with the operating cost a square metre for retail property rising cumulatively by 908.1 percent in this period compared to 696.8 percent for industrial property and 400.8 percent for offices.

He said this cumulative operating cost inflation had far outpaced economy-wide inflation because of sharp municipal rates and electricity tariff hikes. Retail operating costs a square metre in real terms was last year a massive 124.14 percent higher than in 1995 while industrial had increased by a more modest 77.17 percent and office space by a marginal 11.34 percent.

Loos said the strong capital expenditure and operating cost growth could be sustained over the period because of the high level of pricing power of shopping centres. This was reflected in the cumulative inflation rate in retail base rentals of 720.9 percent over the 22-year period compared with 348.2 percent for industrial property and 317.1 percent for office space.

The cumulative result of this strength in retail property ‘pricing power’ over the past 22 years was that it had the top average per annum total return of all the commercial property sectors over the 1996 to 2017 period, measuring an average annual 16.2 percent total return, followed by industrial property’s 15.4 percent and office property’s 12.7 percent.

 
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