The South African commercial property market

LINDSAY WILLIAMS: Stan, that return of 26.7% isn�t bad, but it�s not quite as good as 2005. How is 2007 looking so far?

STAN GARUN: I would say the fundamentals are all extremely good, and if you look at certain sectors - for example office, which hasn�t reached its full potential - I think we�re looking at another good set of returns going forward.

LINDSAY WILLIAMS: Who follows this index?

STAN GARUN: Property investors in fact provide the data, and this index is released internationally among 18 other international indices of commercial property measured in the same way. So it�s very much an investor index, and it�s certainly followed as a measure of the South African property market.

LINDSAY WILLIAMS: I would imagine there�s a few international investors - particularly in North America - that might be looking jealously at numbers like 26.7%? What�s stopping them coming in? Are they starting to put their toes in the South African property market?

STAN GARUN: Absolutely. There is generally more awareness, and as you probably know the recent sale of the V&A Waterfront in Cape Town was a major transaction which physically showed a large deal taking place so ultimately the investors are beginning to show. One of the problems is the constraint we have with less infrastructure than is actually required by a growing market, and there�s probably a lack of understanding of our market - but certainly investors are beginning to awaken to the level of returns.

LINDSAY WILLIAMS: The V&A was a very glamorous sale by Transnet - that was about R7.1billion, which is about $1billion - and the expansion that�s going on there is quite extraordinary. Where is the next Waterfront coming from? What I�m talking about is grass roots investing in JSE-listed property stocks - what are the barriers to people coming in and actually taking a chunk of Vukile or whatever else?

STAN GARUN: I think perhaps it�s size. We are seeing quite a lot of consolidation in the property listed sector where you�ve got certain very large property funds trying to get bigger - so I think size and liquidity is something of a barrier. You will see the South African property market beginning to position itself very strongly towards that in terms of size and in terms of converting to more recognised real estate investment trust (Reit) structures that overseas investors understand.

LINDSAY WILLIAMS: When are we going to convert to Reits?

STAN GARUN: I think we�re in the process of doing that. I�m not up to date with the latest developments, but I believe that there are very positive signs on the horizon so I think that shouldn�t be in the too far distant future.

LINDSAY WILLIAMS: In the commercial, retail and industrial segments I got signs last year that the industrial sector - after having lagged a little bit - was starting to really show form. Has that continued?

STAN GARUN: That�s continued. The return in industrials was ahead of every other sector, and in fact in this year capital growth as well as income yield was extremely attractive - so industrials have led the market quite substantially this year. It would appear with vacancies at the lowest they�ve ever been yields are continuing to compress but industrial probably has quite a lot of pace left.

LINDSAY WILLIAMS: So it�s almost a constraint factor here - the fact that vacancies are at historical lows in fact if there was more available then yields would be higher? Is it a similar situation to other areas South African economy where there are shortages that are hampering growth?

STAN GARUN: Absolutely. There�s a couple of shortages - one is skills, another is very high material building costs, and certainly available land with sufficient infrastructure to support a developing market - so investors are constrained by that and need to extract as<