All types of property set to prosper in New Year
23-12-2004
With real industrial rentals flying and capitalization rates continuing to fall, the focus in the property market is likely to shift from residential to non-residential property, predicts property valuers and economists Rode & Associates in their latest Rode’s Report on the SA Property Market.
In line with their forecasts, capitalization rates for all property types continued to fall during the third quarter of 2004. Capitalization rates — the non-listed property sector’s equivalent of the forward earnings yield of shares — decline when prices rise. Rode Report editor Garth Johnson says that the decline continued on the back of firmly entrenched lower inflation expectations, as well as fierce bidding for non-residential properties by listed funds and the syndication fraternity.
Hurdle rates — the minimum total return required to induce investors to invest in property — remained at highly plausible levels of about 17,5%. “Given that prime quality buildings are selling at capitalization rates of about 11%, the implication is that investors expect a capital return of about 6,5% (17,5 – 6,5 = 11)”, said Johnson.
With vacancies in many decentralised office nodes still above normal levels, decentralised office rentals continued to disappoint in the third quarter of 2004. However, Rode’s analysis of Sapoa’s office vacancy surveys suggests that vacancies of prime-quality (grades A and B) decentralised office buildings in September 2004 are down by about two percentage points on the same time a year ago.
“With the business cycle in the sixth year of its upswing, and an economic growth forecast of 3% to 4% for the next few years, we are comfortable that the excess stock resulting from overzealous decentralised development will quickly be mopped up.”
National CBD vacancies have also come down by about two percentage points in the last year, mainly because of increased take-up of office space in the Cape Town and, especially, the Pretoria CBDs, and continued office-to-residential conversions in some cities.
The Rode economists are sticking out their necks, predicting that over the next few years industrial property may just break out of the depressing secular downswing in which it has been trapped for the better part of the last 20 years.
Turning to indirect property ownership, the report states that the listed property sector should continue to do well. However, unlike the last few years, during which listed property’s performance was underpinned by falling bond yields, the next few years will see prices driven by fundamentals such as declining vacancy rates and growing real rentals. Johnson adds that with listed property’s forward yields currently at about 9% in the case of prime funds and the capitalization rates of, say, grade-A office buildings at about 11%, these funds still have leeway to bid directly-held property prices up further.
Regarding residential property, the report notes that homeowners will have enjoyed growth of 30% to 40% in 2004. Furthermore, growth in the value of lower-priced homes, which have been lagging the performance of middle- and upper-priced houses for some years, continues to accelerate.
The residential boom has, however, not been good for everyone due to its dampening effect on flat markets. With the exception of Durban and Port Elizabeth where flat rentals have grown faster than building costs, flat rentals have not even managed to outpace headline consumer inflation in most other areas.
Prospects are bright for the building-construction industry as the party that contractors enjoyed during 2004 is set to continue in 2005. Johnson foresees building activity in both residential and non-residential markets booming in 2005. “The continued buoyancy in the building industry, coupled with a shortage of skilled artisans, will lead to a further acceleration in building costs.”
