There has been a marked increase in activity in the real estate sector with new development projects coming up in the different sub-sectors: retail/commercial, office, industrial and Integrated Resorts Scheme (IRS)-Mini IRS. In this outlook, we will provide an outlook for the different sub-sectors and will be focusing on the retail and office sectors. The latter sectors have both witnessed major restructuring during the last few years, largely driven by amendments in the legal framework regulating the market and along with new market trends. On the demand side, the general requirements of the tenant have also changed over the years.

The commercial property market is showing signs of momentum in prime locations within the city centre and tourist centres on account of the amendments of the Landlord and Tenant Act in 2005, in an environment of increasing demand from tenants. Investors are also showing increased interest in the sector. Rental yields currently look more attractive than they were a few years ago. The average rental yield for this sector for example hovers anywhere between 9% and 13%. In some cases, rental yields are higher than long-term bond yields, thus making the former relatively more attractive than the latter.

The preferred investment option of the moment consists mainly of developing projects after which the investor can sell a percentage of the investment and then following a hold and lease strategy for the remaining premises at his disposal. The most successful projects have been in out-of-town locations where the projects have an integrated approach i.e. food court with chain stores, shops and most importantly with an anchor tenant attached to the development. Most of these projects are taking the shape of shopping centres and the rentals achieved are similar to high street locations within city centres. From an investment perspective for a developer, prospective returns vary from 15% to 25%.

This outlook indicates that there is likely to be both strong tenant and investor demand. On one side, tenants will be looking for new locations as they expand their operations and shift to new locations and on the other, institutional investors will fuel demand for higher quality properties. This expected increase in activity is expected to bring a certain degree of stability to the market in the medium term.

Currently investor sentiment in this sector is mixed. On the supply side, investors and developers are bullish, largely driven by excess liquidity in the economy and attractive incentives provided by the authorities. There are several projects in the pipeline with no less than five major projects in the city centre, various projects in the Ebène region and other regions on the outskirt of many towns.

On the demand side, new tenants are looking for higher quality facilities and tailor-made solutions while existing tenants are planning to move to better facilities. There is clear sign of increased demand for buying or leasing state-of-the-art offices with high quality interior and exterior finishing both in primary locations within city centres and in well-located business park developments. This essentially translates to higher supply in secondary locations.

These factors will make rates become more competitive and only the most effective promoters are expected to get the lion?s share of investments. With the expected shift in demand and supply, we believe that there may be some stagnation in rental yields. Typically, rentals across the country vary between Rs20 up to a maximum of Rs55 per sq. ft. per month and investment returns achievable generally vary between 8 and 14%.

The leasing market for industrial premises is somewhat active. One of the preferred locations sought after by most active players in the industrial business is along the Phoenix?Port-Louis motorway; mainly due to extensive road infrastructure along the way. However, high land prices in these areas and ever rising construction costs have decreased the attractiveness of the sector significantly and have forced major players to look for alternatives in other regions.

The opening up of the property market to foreigners is changing the face of the real estate market quite significantly. Under the Business and Facilitation Act, foreign investors, the self-employed and non-citizen retirees are permitted to buy on the local market.

?The commercial property market is showing signs of momentum in prime locations within the city centre and tourist centres on account of the amendments of the Landlord and Tenant Act in 2005?

Because of the large extent of land required to qualify under IRS schemes, the government has included in th2007/08 Budget amendments to allow development on smaller areas destined for foreigners. This measure is encouraging local investors-promoters to come up with high quality projects that aim to satisfy the requirements of this specific market segment. There are a number of such projects across the island. Many real estate agents have been complaining about the lack of high standard villas-apartments, which is now encouraging promoters to deliver only that. Real estate agents are forecasting a monthly return of around 20% on such projects rented to foreigners.

Furthermore, with the number of IRS projects around the island, real estate professionals are forecasting several developments around those projects such as shopping malls, private health care centres and other residential hubs. Experts are also expecting a rise in ?morcellement? projects across the island.

With so many ongoing projects, all the main building contractors have already been fully booked for the next three to four years.

<B>Contributed by INVESTMENT PROFESSIONALS LTD</B> (Feedback: [email protected])

<B> Disclaimer</B>

This analysis report is provided by Investment Professionals Ltd. for information purposes only. Neither the information nor any opinion expressed constitutes an investment advice, an offer or an invitation to make an offer, to buy or sell any fund or stocks. This report does not have regard to the specific investment objectives and financial situation of any specific person who may receive/read this report. Investors should seek financial advice regarding the appropriateness of investing in any funds or stocks and should understand that future expectations may not be realized. Investors should note that the price or value of any funds or stocks may rise or fall. Past performance is not a guide to future performance.

THE LANDLORD AND TENANT ACT 2005

<B>A changing regulatory environment</B>

In 2005, legislation was brought to the effect that all sitting tenants would have to bear an increase in the rents paid over a seven-year period so as to catch up with the current open market rental. Rental increases would be spread over a seven-year period in order to alleviate the burden on tenants as prices converge towards open market rates.

Under the new provisions, a landlord can request a rental review immediately based on two methodologies. He can either have an objective valuation of his premises conducted or apply the ongoing market rates.

In essence, the law stipulates that as from 2005 (when the amendment was enacted), the landlord and the tenant would agree on the market value of the rent. However, the rent payable would be increased every year over a seven-year period, calculated as follows: 15% x (market rent agreed ? rent payable under current tenancy). Thereafter an agreement would be reached between the landlord and tenant with regard to the rental value and its annual growth rate.

Tenants would of course be the first ones affected as they would have to pay higher rentals. Strong tenants would be able to afford the new rates while those, who cannot afford rents in prime locations, would have to relocate to secondary locations. In cases, where tenants refuse to pay the new rentals or find the new rates excessive, they can appeal to the Fair Rent Tribunal.

The new amendments also facilitate the process by which the owners of old commercial properties can apply for a reconstruction scheme, something that would replace the eyesore buildings that are currently seen in many places on the island with modern buildings. Previously, the legal provisions were such that landlords faced difficulties in trying to engage into the redevelopment of existing buildings in prime locations. Legislation only allowed such practices when substantial compensations were paid out to sitting tenants. In most cases, the compensations requested made property development projects unviable.

The reasons to account for this are that prior to the amendments of 2005, adjustments to rent payable were based on the Landlord and Tenant Act 1999. The main features of the latter were an increase in basic rental by 50%, effective immediately after the promulgation of the Act in1999. And thereafter, an annual increase of 5% after three years.

Although these provisions tried to facilitate the alignment of rents to current market rates, the adjustment mechanism was unsuccessful in bringing into line rents quickly enough to current rates due to the extremely low bases that prevailed.

<B>A typical example:

Rental of a shop at Place D?Armes, 1999

Rent as at 1999 Rs3.00 per sq. ft

With the 50% increase Rs4.50 per sq. ft

Escalation to 2005 15.8% (5% p.a over 3 years)

Rent as at 2005 Rs5.21 per sq. ft

Estimated market rent as at 2005 Rs75 per sq. ft

As illustrated by the example above, convergence of rental rates to market rates proved almost impossible and cost owners dearly. This resulted in very low yields and subsequently low returns on existing investment properties, thereby discouraging landlords to carry out refurbishment and undertake renovation. We believe that the amendments to the Landlord and Tenant Act should allow for rental increases in a relatively fairer and more efficient way and with landlords now able to enhance their returns on existing investment properties, they will be more motivated to make further investments.

● <B>Tips for maintaining the building in a good state</B>

Very often the value of a building falls mainly because it is very badly maintained. Although we are not giving specific examples of such properties in prime locations, it is an undisputed fact that many buildings are an eyesore for the public. Roughly speaking, it can account for a non-negligible loss of 10 to 20% in market value. Some useful tips that could help you maintain and protect the capital value of your property are:

● <B>Adopt a preventive maintenance policy</B>

Instead of having an ad-hoc maintenance policy, that is making intervention only when problems and complaints crop up, you need to put in place a maintenance schedule. This would undoubtedly prove beneficial in the long-term and will help in significant cost cutting. For example, the maintenance of an air -conditioning system and lifts could be done on a monthly basis, while the state of the building could be assessed on a yearly basis at least.

● <B>Ensure proper communication to the maintenance team</B>

The set up of a schedule detailing the works to be performed for maintaining the building should be agreed among the parties concerned, in particular with the ?maintenance team?. This will make the maintenance accountable and responsible for the works to be performed, and hence help in avoiding a wastage-duplication of resources.

● <B> Make sure that the maintenance plan is followed</B>

There should be a supervisor or a team leader who supervises the daily intervention and routine maintenance. A report should be prepared daily, which should be used as evidence that maintenance is being carried out. This will also help the accounting department in its exercise of cost allocation especially in cases where there are different buildings.

● <B>Keep and identification sheet for all equipments and materials</B>

An identification sheet gives details about: . the date of purchase; 2. the make; 3. the cost; 4. the supplier ; 5. details about the warranties; 6. details of each intervention on the equipment and the cost.

This document will help in the decision making process regarding the efficiency of the maintenance team as well as replacement investment.

● <B>Proper maintenance contract</B>

It is recommended that a proper maintenance contract be made with the supplier of equipments. This is particularly relevant when the property contains heavy equipment like chillers and generators where replacement costs are very high.

● <B>Ensure that a proper commissioning certificate is issued</B>

After all major renovations or installation of equipments have been completed, it is recommended that a proper commissioning certificate be duly signed by all parties concerned.

● <B> Insurance policy on all equipments

Insurance policies are particularly useful in avoiding additional costs on replacement or on repairs of equipment during their usage.

● <B>Warranty certificate properly filed so that retrieval is easy

It is also important to file warranty certificates so that retrieval becomes easy whenever there is a breakdown or malfunctioning. Warranty certificates are also given on services like waterproofing. There is normally a ten-year warranty.

● <B>Provision for a sinking fund for the replacement of equipments

Because of the lack of planning and provisions, problems very often crop up concerning replacement of heavy equipments. For example a lift normally has a lifetime of 20 years and a proper sinking fund would prove helpful when its replacement is due. A sinking fund is a monthly provision made to cater for the future replacement cost.