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Rode’s Growth Points a vital tool in determining risk

Thursday, October 16, 2008

At a time when the world and its bankers have become more risk averse, Rode has released the second and improved issue of Rode’s Growth Points. This publication rates the investment attractiveness of 80 office nodes and 200 industrial townships countrywide.

Erwin Rode, CEO of property researchers Rode & Associates, points out that property investors and their bankers should consider three layers of risk when making investment and financing decisions, viz. the

1) individual property’s risk, also known as idiosyncratic risk (it includes factors like the design of the building and the covenants);
2) risk of the location (prospects for the node or township in which the property falls); and
3) systemic risk (risk that cannot be diversified away, e.g. when the market is at the top end of the long property cycle).

Explains Rode: ‘Rode’s Growth Points is an annual publication that was designed to evaluate the second of these factors – the location risk – and works hand in hand with our other publication Rode’s SA Property Trends, which deals with, inter alia, systemic risk.'

With Rode’s Growth Points, they classify the risk of a micro location by ranking office nodes and industrial townships using criteria such as the level of current market rental rates, land values and historic growth rates. Rode’s SA Property Trends, on the other hand, establishes the optimum timing of investments with reference to the long property cycle. Thus, these two publications offer answers to both the ‘where’ and the ‘when’ of property investment.

Taking the US housing market as a model by which to explain systemic risk, Rode notes: ‘For years, from 1950, real prices moved in a horizontal band until 1999, when they rocketed out of this long-term range into the stratosphere. Thus, one can say that the US was already exposed to very high systemic risk from 2000 onwards. In South Africa, a similar phenomenon can be seen, with real house prices entering over-priced territory around 2003.’

Rode defines a price bubble as a situation where real prices approach, or exceed, historic peaks. ‘That’s when irrational exuberance takes over, and no amount of warning will stop the rocket ride of the small investor and consumer at this point,’ says Rode. ‘It’s part of the human condition and inherent to free markets. But the strange thing is that banks and professional property investors in many countries had also ignored the flashing red lights.’

Rode’s Growth Points is supplied as a CD with interactive maps and an interpretive report that provide industry players with instant spatial overviews of areas showing both non-residential growth and stagnation across nine of South Africa’s cities. These cities are Johannesburg, Pretoria, Cape Town, Durban, Port Elizabeth, East London, Bloemfontein, Nelspruit and Polokwane.

The recently released 2008/9 version also includes discussions on:

• Proposed new bus-rapid-transit (BRT) systems for some cities;
• Spatial planning in Durban and Johannesburg;
• Comments from brokers on the Rode panel about particular areas; and
• Municipal planning factors such as Urban Development Zones (UDZs).

Developed by urban geographer Nancy Keggie, the 2008/9 version of Rode’s Growth Points has again revealed key information.

'On the office side,’ notes Keggie, ‘we’ve seen Nelspruit excel yet again. The East Rand has the lowest grade-A rentals in the country, while the top performing nodes are Portswood Ridge and Granger Bay in the Cape Town Waterfront precinct and Melrose Arch in Johannesburg.’

On the industrial side, Rode’s Growth Points 2008/9 reveals that the shortage of available land continues to push up prices in Durban, while top townships are Longmeadow and Cambridge Park on the Witwatersrand and River Horse Park in Durban.

‘Nelspruit is again on the radar as far as industrial property goes,’ notes Keggie. ‘Its average rental levels are higher than Cape Town’s and only slightly below those of the Central Witwatersrand!’

Says Erwin Rode: ‘Rode’s Growth Points, particularly when used in conjunction with Rode’s SA Property Trends, is an essential tool for CEOs, general management, fund investment managers, bankers and analysts if they are to successfully fulfil their roles in planning investment or disinvestment strategy.

‘Each one of these products has been developed to be used on its own, but together they form the ultimate tool for planning precise investment strategy, with the one determining the timing of non-residential property investments and the other their optimal geographic location.’

For more information please contact:

Rode & Associates
Tel: (+27) 21 946 2480
Email: nancy@rode.co.za
Or visit: www.rode.co.za

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