Declining capitalization rates spell good news for property values
05-04-2004
The tide seems to be turning positive for capitalization rates — and thus for property values.
The downward trend in capitalization rates follows on the persistent demand for directly-held property from listed property funds and syndicators. It could also be an indication that the current oversupply from overbuilding is gradually being mopped up, says Rode's Report editor Dirk De Vynck in the latest edition of the publication.
Capitalization rates — the non-listed property sector’s equivalent of the forward earnings yield of shares — decline when prices rise, holding constant market rentals.
"This is excellent news for the property market and implies that investor perceptions towards directly-held property are improving. At the same time the heightened demand for directly-held properties implies that investors will have to pay more and hence will have to act quickly to get into the market, that is if they can get their hands on prime-quality properties."
He says the increased demand for prime properties is even evident in the industrial sector, the worst-performing non-residential property type, where industrial leaseback capitalization rates started declining in the last quarter of 2003, after still being on the up in the previous quarter. This decline was apparent in all the main industrial conurbations.
"This could be the first indication that the worst may be over for industrial property, but in order for the trend in capitalization rates to move into a definite downward path, real industrial rentals will have to rise. This is sadly not yet the case," says De Vynck.
"Still, industrial vacancies have been declining for some time and are on average below 10%, which implies that a sudden spurt in the demand for industrial space could lead to a quick turnaround in rentals."
The decline in shopping centre capitalization rates has been evident for the last two quarters — for regional, community and neighbourhood shopping centres.
Further good news for non-residential property investors, is that capitalization rates for prime decentralized offices in Cape Town and Durban continued their downward trend — this despite the substantial oversupply in Cape Town's southern suburbs. In Johannesburg decentralized, Sandton CBD office capitalization rates have also been softening, signalling an improvement in investors’ perceptions towards the office market in Johannesburg’s main business hub.
This improved performance could be an indication that investors see the current oversupply of office space as a cyclical phenomenon, which will quickly be mopped up if office demand continues to pick up speed.
