REAL ESTATE - Potential returns from South African real estate are encouraging overseas investors despite the perceived risks, according to research firm International Property Databank (IPD).

Stan Garrun, IPD South Africa managing director, said: “One of the main problems has been investors’ perceptions of the market. They’ve lumped South Africa in with the rest of Africa, but they just can’t ignore returns of 30%.”

Industrials and retail both returned above 30% in 2005, with retail in Cape Town returning 40.7%. Offices in KwaZulu Natal reported the strongest growth, from 10.5% in 2004 to 29.6% last year.

In addition, strong domestic demand drove down vacancy rates in 2005 from 7.8% to 5.3%. Yet domestic is exactly what the demand has been to date: Garrun acknowledged that the evidence for increased interest from overseas investors was largely anecdotal.

“We’re getting more enquiries from foreign investors wanting to understand the structure of the market and the likely returns,” he said.

Garrun predicted investors would target “trophy properties” – shopping centres and mixed-use commercial properties – rather than uncertain residential.

Recent government pronouncements have indicated less than overwhelming support for foreign property investment. A panel set up to investigate foreign land ownership earlier this year recommended a moratorium pending legislative change.

“What the government needs to do is make clearer statements allaying investors’ fears,” Garrun said. “The rules and regulations need clarification.”

A lack of political support, regulatory constraints and capacity constraints –including a shortage of skilled architects and engineers – will constrain foreign investment.

“South African real estate won’t be huge – I don’t think we’ll have an avalanche,” said Garrun. “But there will be a gradual process. Planning and skills constraints will affect growth to some extent. They won’t generate a decline but they will prevent the market doubling.”