Blog by Rode

Ever since the first quarter of 1993, Rode’s Report (RR) has been publishing average monthly parking rentals for office buildings by grade. In this issue of the report, we attempt to quantify the relationship between office parking and office rentals.

Owing to slowing economic activity, office vacancy rates have over the past three years edged north and, in general, are now above their estimated ‘natural’ levels.

It appears estate agents and house investors and other stakeholders in the housing market have experienced serious anguish and denial following the launch of Rode’s Report (quarter 4 of 2011) on 26 January 2012.

Heritage practitioners and other concerned parties in Cape Town are up in arms. The war of words was prompted by the proposed addition of a parking garage and office block on top of a dilapidated warehouse built in the VOC era, situated in the so-called Lutheran Church block in the Cape Town CBD.

An onerous title deed condition that isn’t discovered in time could delay or prevent the progress of a property development – with serious cost implications. Alternatively, such an omission could be costly when buying or selling property.

The two crucial determinants of income-producing properties’ market value are market rentals and capitalization (cap) rates. By comparison, all the other determinants are incidental.

In the residential property market, estate agents and valuers have a serious problem in estimating the market value of a house.

The below-par investment performance of most South African retirement funds over the past few years was recently again put under the media spotlight. Yet, some asset classes have done exceedingly well over this period.

Hurdle rates required by investors to induce them to invest in property were basically un-changed at 19% in quarter 2003:1 — a level at which they have been for many years. At the same time, the leaseback escalation rate got stuck at 10% or higher.

Ever since the fourth quarter of 1991, Rode’s Report (RR) has been publishing regression equations to calculate the capitalization (cap) rate of office-building and industrial-building properties.

In an inflation environment, the purpose of contractual rental escalation rates is to obviate the need to renegotiate the contractual rental once a year or so. In a hyper-inflation environment, this “or so” could be monthly, of course.

It is hard to believe that 15 years ago, the market rated listed property far superior to long bonds, a situation that has since been totally reversed. The question is why?

One of the outstanding features of the new South Africa and the ANC-led government is its stable macro-economic policies, with lower inflation being one of the biggest beneficiaries.

The nominal returns of institutional property have been in a secular downswing for the last 20 years, and the expectation is that this year the trend will continue.

The South African government sold the first inflation-indexed long bond in March 2000. Bids ranged from 10% to 5%, and only a small amount of nearly R500 million of the R189 — maturing in 2013 — was allotted at the cut-off price of 6,5%.

Way back in 1978, when I started doing my first tentative property forecasts, life was simple. The forecaster could assume, and bank on, an inflation rate of 15% or so. All metropolitan areas and all property types were growing at a similar rate, or so we assumed.

After more than a decade of austere monetary policy, South African property players are at long last lowering their profit and growth expectations.

We are all so engrossed in our daily lives that we far too often miss important milestones in our hectic lives. One such a milestone for Johannesburgers is the fast-approaching deadline to object to the new general valuation appraisal of their properties.

Commentators sometimes claim that house prices are about 25% below replacement costs, and that, hence, there is great upside potential for prices.

May 2000

Two years ago, listed property in SA stood at a discount of about 30% to directly-held real estate. This meant that there was a huge difference between the capitalisation rates of directly-held property on the one hand and the forward dividend yield of listed property on the other. Theoretic...