Directly-held property: let them good times roll
31-03-2004
The tide seems to be turning for non-residential directly-held property, with capitalization rates continuing to decline (improve) in the last quarter of 2003. This confirms the turnaround noticed in the previous quarter, say property economists Rode & Associates in their latest quarterly Rode's Report 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.
Even the capitalization rates of industrials, South Africa’s worst performing nonresidential property type, started declining in the last quarter of 2003, after still being on the up in the previous quarter, says Rode’s Report editor Dirk De Vynck.
This improving trend can be attributed to the sustained demand for non-residential directly-held property from listed property funds, and to a lesser extent from property syndicators. “It could also be an indication that the oversupply from over-building is gradually being mopped up, which in itself implies that the prospects for market-rental growth must be improving,” De Vynck says.
On average, real decentralized office rentals continued their downswing in the last quarter of 2003. This is despite the healthy office take-up noticed in the suburbs. Still, if the robust take-up continues, it should only be a question of time before real office rentals start climbing again. According to Rode’s forecasts, the turnaround in real decentralized office rentals should appear from the end of 2004.
In the CBDs, little has changed with respect to the secular (long-lasting) downturn, with only Johannesburg real office rentals showing some encouraging signs of a possible recovery. However, Rode’s analysis of Sapoa’s vacancy data shows that office take-up in the Cape Town and Pretoria CBDs in 2003 was healthy, which, if it continues, should eventually lead to increasing real rentals.
As for industrials, the upward march in Port Elizabeth’s nominal industrial rentals continued in the last quarter of 2003. This has been boosted by a strong demand for industrial space by especially the automotive and related industries. But despite this heartening performance, Port Elizabeth’s industrial rental levels are still lower than those in the other main industrial conurbations.
In the Cape Peninsula, the recovery in nominal rentals continued, whilst in Durban and on the Central Witwatersrand, the performance in nominal industrial rentals remained muted, with little change noted from the sideways movement in rentals that has been evident since the end of 1997.
Sobering news for residential investors is that flat rentals, after adjusting for building-cost inflation, are essentially moving sideways. The exception is Johannesburg, where real rentals are falling sharply.
Conditions in the building-construction industry remained favourable in the last quarter of 2003. Despite a softening in residential building activity, the mood remained positive, boosted by the present favourable interest-rate climate. As for home-builders’ profit margins, there was still no end to the exuberant growth seen since 1998.
On average, building activity in the non-residential market continued to gain momentum, mainly because of the heightened activity noted in the building of industrial buildings.
