The Drivers Of Direct Commercial Real Estate Returns In An Emerging Market: Evidence From South Africa

There is limited research and robust data on the performance drivers of the underlying commercial real estate assets in investment portfolios as opposed to the residential and listed property sectors in the South African context. SA real estate competes internationally and the rapid growth in emerging countries is creating new real estate players and growing competition for real estate investment opportunities (PwC, 2015). It is important for investors in the industry to understand the factors that affect the sector’s performance to be able to plan and revise investment strategies, to allocate resources efficiently and to understand past trends and manage future risks.The study is aimed at understanding the performance of the SA direct commercial real estate sector and identifying the key factors that affect the sector’s returns in the country. Using Pearson’s correlation analysis and regression analysis, the study statistically tests for relationships between macroeconomic indicators, property performance variables and direct commercial real estate returns as measured by the International Property Databank (IPD) over the past 20 years from 1994 to 2014. The study finds gross rental escalation and real GDP growth rate to be the key drivers of direct commercial real estate total returns which suggests that real estate rental income growth and performance are highly related to the economy. The findings assist in understanding the behaviour of the direct commercial real estate sector and provide a basis for property investment analysis and asset allocation decisions at different economic conditions.ORIGINALITY: This paper is extracted from the first author’s PhD research on liquidity in commercial real estate markets. Social networks have been explored in business and built environment, but there are no previous studies that have sought to understand social networks in office sales markets.