Industrial property star performer
31-03-2005
Industrial property has turned out to be the star performer on the property front last year. According to Rode’s Report on the SA Property Market, low vacancies and almost 4% growth in manufacturing volumes since the last quarter of 2003, resulted in robust growth in industrial rental and stand values during 2004.
“Real industrial rentals are still growing at a rate that beats building-cost-inflation,” says Rode & Associates property economist Erwin Rode.
The manufacturing growth took place in spite of the strong rand, as it was driven by domestic demand caused by low interest rates and rising asset prices — particularly residential properties, but also equities. The strong consumer demand manifested itself in booming retail sales, which, in turn, probably also put upward pressure on the rentals of warehousing space — because new storage space has to be built at today’s building costs.
“We expect industrial rentals to post further robust growth in 2005, in view of the rosy prospects for economic growth in 2005, the momentum already in the economy as a result of an upswing that is already in its 7th year, and the fact that building costs are set for further acceleration,” says Rode.
But the latest Rode Report indicates that the office market is still battling in places. In the reporting quarter, nominal rentals in CBDs were disappointing, with Johannesburg CBD growing at a mediocre 3,8%. Even though its counterparts in Pretoria and Durban showed solid growth with 12,1% and 9,9% respectively, building-cost inflation outpaced them by growing at 13% over the same period. With a rental growth of 13,9%, Cape Town CBD was the only CBD to post positive real rental growth.
Nominal office rentals in decentralized nodes continued to slide during the fourth quarter, in spite of continued declining vacancies, which in many cases are now at their long-term levels. Durban decentralized was the only exception, with a year-on-year growth rate of 4,8%, but it was still not enough to beat building-cost inflation.
Meanwhile, capitalization rates of all categories of property continued to fall in the last quarter of 2004, reflecting strongly rising market values. The boom in market values was driven by strong investment demand from listed funds and syndicators. Capitalization rates — the non-listed property sector’s equivalent of the forward earnings yield of shares — decline when prices rise.
Rode notes that on the industrial and office scene, capitalization rates are currently at levels last seen in the late 1990s.
“As far as retail is concerned, the regional shopping centre capitalization rates are currently a whole 2,5 percentage points lower than they were at the beginning of 2003. With strong consumer demand, a growing black middle-class, and low and stable interest and inflation rates, we expect demand for shopping centres to continue to put downward pressure on capitalization rates in 2005.”
With the scope for viable, new regional centres limited, competition for a piece of the pie is bound to become even fiercer, predicts the Rode team.
Rode’s fourth-quarter survey shows that, depending on the property type, investors require a total return of between 16,5% and 17,5% in order to induce them to invest in existing prime properties. With the current income yield for prime office properties at about 11%, this hurdle rate implies that investors expect capital appreciation of about 5,5% to 6,5% per annum over their investment horizon (17% 11% = 6%). (Total return equals income yield plus capital appreciation.)
In the last quarter of 2004 the trailing yield of property unit trusts (PUTs) fell below that of long bonds for the first time since 1997. PUT yields fell even faster than capitalization rates, owing to increased demand for listed property because of rosy income-growth prospects coupled with low risk.
The Rode team found that house prices, in all price categories, in the Cape Peninsula have outperformed the rest of the country since 2000. Furthermore, upper-priced homes generally performed better than middle- and lower-priced homes over this period. Anecdotal evidence also suggests that the residential property market was still growing at a firm pace in the first two months of 2005, says Rode.
Port Elizabeth confirmed its status as the best performer in respect of flat-rental growth, with Durban in second place, far behind. “We expect it to continue to grow for the remainder of the year, but not at the same tempo as in 2004.”
Rode Report expects building-cost inflation to remain in double-digit territory in 2005, as building activity in the residential and non-residential sectors is expected to remain strong.
