Current state of affairs - Vukile Property Fund CEO Laurence Rapp

Laurence Rapp CEO Vukile Fund Laurence Rapp CEO Vukile Fund

We’re at a very, very interesting juncture in the property industry, in South Africa.

When you look at the landscape and you see cranes, you’re seeing the manifestation of plans that were put into place maybe five or six years ago – of people acquiring the land, getting their zoning, putting up projects together, putting their schemes together. Now you’re going to see property coming on stream into a very, very weak economy. It’s interesting when you look now.

I think that a lot of property practitioners have probably still not cottoned on to the fact that the world has changed – in just two months. Cost of capital has gone up by around 150 to 200 basis points, at least, in that period. That means that a project that was viable then is no longer viable.

That takes people time to adjust to. So, when you have a look now at these projects happening that’s really something that is already committed. It’s in the pipeline. Invariably you’ve got big corporates going in as tenants. I’m thinking of Sasol and Discovery. The Webbers building is completed in Sandton.

When you look at Sandton you’d think that there’s tremendous economic activity, which, unfortunately, is not the case.

Normally you can, actually, in many countries, get a gauge of economic activity by how many cranes are in the skyline. We’re not seeing that in South Africa. There are the cranes but it’s about people moving, it’s not new construction as in new businesses grow. It’s really just replacing existing property.

I think the property sector is in a very challenging space at the moment. I think we’re going to see a major drop off in new developments coming on stream. What’s really in the pipeline will be completed – will there be new projects? Look at the maths of it. When your cost of capital goes up the only the only way to ensure that your project is still viable is to push your rent up.

If you can’t push the rent up because the economy is in depression and there’s an oversupply, especially, of office property then a lot of new development and new schemes becomes unviable. That’s how prices drop off.

What’s the silver lining positive on that? If you’re a property owner and you have stock, your property becomes scarcer because there’s less new supply coming on to the market. (Constricted supply) means more pricing power for landlords.

Excerpts from Interview with Laurence Rapp held on 20 January 2016

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