Media release: State of the property market according to Rode

30-05-2002

Rode's Report on the SA Property Market 2002:2

South Africa’s non-residential property market is still in the doldrums, with the first quarter of 2002 witnessing a continuation of the market’s cyclical downswing.

The latest Rode's Report on the SA Property Market shows that even Cape Town, which last year still managed to keep its head above water, seems to have succumbed to the market’s oversupply pressures.

However, in the residential property market things still looked upbeat, with no sign that the upward pressure on interest rates was having a negative effect on the market.

Rode’s Report editor, Dirk De Vynck, says of the 2002 first-quarter figures that industrial rentals in all the major industrial regions are still not showing any sign of life. "Even Cape Town, which up to the beginning of last year still performed relatively strongly, has seen its rentals drop quite significantly. For the Central Witwatersrand and Durban, the last decade has been catastrophic."

The cracks are further starting to show for Cape Town: capitalization rates for regional shopping centres indicate that the city may finally be losing the shine it's had since the late 1990s.

Capitalization rates are the property equivalent of the forward earnings yields of shares, and as such reflect investor perceptions regarding growth prospects and risk. Thus a rise in capitalization rates reflects investors' worsening sentiment towards property, whilst declining capitalization rates reflect improving sentiment.

The Cape's worsening capitalization rates could be an indication that the Western Cape economy has been slowing down relative to the rest of the country, says De Vynck.

But the bleak picture extends further. Even worse off is Durban, where Rode’s Report shows regional shopping centre capitalization rates have taken a huge jump in the last five quarters. "This was brought on in part by the completion of the Gateway shopping centre in Umhlanga, possibly worsened by reports that some of the shops are not doing all that well."

On the upside, De Vynck says that despite the recent rise in office vacancies, office demand in most of the decentralised nodes still indicates a relatively strong office market. This implies that the oversupply is the result of over-enthusiastic development rather than a lack of take-up.

"Office take-up in Pretoria decentralised has been growing steadily for the last five quarters. This corresponds with the general decline in the city’s office vacancies. Pretoria’s healthy office market is another indication that the new South Africa has been good to the city," he says.

The report concludes that decentralised office rentals are finally dropping due to the persistent oversupply. But this is only a cyclical phenomenon, says De Vynck, as take-up is still high.

Office rentals in the Cape Town CBD have performed relatively well over the last decade, especially when compared to the rest of the country’s CBDs.Cape Town’s CBD is the only one where real office rentals have grown since 1994. Although real office rentals seem to be slowing down, which can in part be attributed to the general slump in the office market, early indications are that the Cape Town CBD’s city improvement district (CID) is bearing fruit.

As regards listed property, this sector's listless performance since the end of 2001 can partly be attributed to a general slowdown in rental incomes as reflected in property funds’ slight decline in dividend streams.

Other than this fundamental reason, listed property has also been dragged down by higher bond yields, which in turn were the result of the fall in the external value of the rand. The financial market regards listed property as a substitute for long bond yields; hence higher inflation expectations pushed up the income yields of both bonds and listed property.

De Vynck’s latest analysis shows that listed properties are now on average 18% undervalued relative to directly-held (unlisted) property. This represents a further widening in the gap from the 15% undervaluation in the firm’s analysis of a quarter ago.

On the residential side, the report concludes that houses in Johannesburg are still underpriced, which means that the city can expect further increases in house prices. However, in the case of Cape Town, houses seem to be overpriced at the moment, which means that house prices could be expected to mark time for a while, especially should the Western Cape economy slow down further.

These conclusions are based on a comparison of the long-term trend of house prices (as measured by Rode’s House Price Index) with building costs (as measured by the Rode Home Building Cost Index).