Rental income in the commercial property market is on the increase after decades of decline, countering the last interest rate hike, in which the Reserve Bank raised its repo rate by another 50 basis points.

The repo rate increase, now at 400 basis points, has affected the commercial property industry, with new developers in the industry hard hit by land price increases and higher material and labour costs. In some cases materials have doubled in price over the past 12 months.

“Because the supply of new commercial developments is not meeting the current demand, the opportunity in the commercial property industry lies with tenancy,” said Kevin Roman, group chief executive officer of Hermans & Roman Property Solutions.

“Prime rental space in the three commercial property sectors – office, industrial and retail – is in high demand and is increasing at a far greater pace than the effect of interest rate rises, which means the boom in the commercial property industry is set to continue. In each of these sectors vacancy rates have fallen considerably and are at historically low levels with investors enjoying yields of nine to 10 percent.”

Cape Town offices at R200/m² sets a new benchmark.

Recent events in South Africa’s office rental industry have acted as a further catalyst to boost this trend. The signing of a lease for prime office space in Cape Town at R200/m² has set a new benchmark in the office rental industry.

It is a trend that may be here to stay, said Roman. “For the first time ever prime South African office rent is sitting at an average of R126/m² in Cape Town and is set to increase annually by 20 percent, if not more, as SA prepares to reverse the status of its local office rents after years of decline.”

At present South Africa has the lowest office rent compared to most international cities, with London’s West End having the highest office-rental income of about R1569/m².

“This bodes well for the future growth of commercial property despite the repo rate increase,” said Liezel Conradie, executive manager at Hermans & Roman. “Those developers already on the market are perfectly poised to see huge returns on their investments and owners of commercial property will enjoy a cash-flow injection from their assets.”

Property management companies are also reaping the benefits, with funds set to perform beyond expectations, said Conradie. “At Hermans & Roman, our existing portfolios are set to grow exponentially in value, which means we are close to exceeding R7-billion under management. All the market factors have synchronised to benefit the industry as a whole, despite the repo rate increase forecasted for early 2008.

“The future of the commercial property industry looks bright, it’s getting a foot in the door that’s the problem,” she said.