The residential property sector gardnered much attention during its bubble period from about 2000 to 2008, and was regarded as the “expensive” property category for a while thereafter.
Over the past two to three decades, however, the retail property sector has been the outperformer, and has become relatively expensive “in every way”, says FNB’s property economist John Loos.
“For a few years following the end of the pre-2008 property boom, there was a perception among some that it was the residential property market that had overshot the mark most during those prior boom years, while commercial property remained relatively cheap.”
While this may still be so in the case of office and industrial property, retail property began to outpace residential property “significantly” after the 2008/2009 recession and, he explains, appears to have become the country’s most expensive property category.
“Given the data available, the retail property sector appears to have been the strongest cumulative performer of the three major commercial property sectors over the past 22 years from 1996 to 2017, according to MSCI historic data, and possibly even over the past 30 years judging by Rode & Associates’ cap rate data.
“It has achieved superior capital growth even excluding all the capital expenditure on properties over the years.”
And while this is great for investors, it does pose a risk as more retailers look for more cost-effective alternatives. These include online retail as well as greater use of warehouse property.
In terms of capital values, MSCI data shows that from 1996 to 2017 - using 1995 as the base year - the average capital value per square metre for retail property is estimated to have risen by a huge 877.4% over the 22-year period from 1996 to 2017. By comparison, Loos says the industrial and warehouse sectors had a more modest increase of 544.8%, and office space an increase of 523%.
Although estimates of average house-price growth are not exactly comparable, because they are done on a per unit basis instead of a per square metre basis, he says it appears that retail has even outperformed this sector over two decades.
“Retail property’s rise in average capital value per square metre was an impressive 117.3% from 1996 to 2007, residential 71.4%, industrial property 43.4%, and office space 38.5%.”
In ways other than capital value, retail property has seen its affordability deteriorate significantly more than the other two major commercial property classes.
Loos says the retail sector’s operating cost per square metre has also outpaced the others, and “far outpaced” general economic price inflation. The sector has been able to recoup much of its capex and rise in operating costs through its recoveries and having the strongest rental inflation rate over the two-decade period too.
“Retail property’s operating cost per square metre has risen cumulatively by 908.1% from 1996 to 2017, compared to industrial property’s 696.8% and office property’s 400.8%. Most importantly, this cumulative operating cost inflation has far outpaced economy-wide inflation as measured using a GDP deflator.
“Therefore, even in real terms, retail operating cost/square metre as at 2017 was a massive 124.14% above its 1995 level (albeit starting to moderate), whereas industrial was a more modest 77.17% higher and office space a marginal 11.34% higher.”
Sharp municipal rates and electricity tariffs increases have been key contributors.