News release: Rode's Report for quarter 2000:2
Property Poised for Recovery
The SA property market has shown favourable, albeit patchy, signs of improvement on the back of better business prospects in the first quarter of 2000. But, according to property economists Rode & Associates’ quarterly property report, the industry is far from being out of the doldrums.
Rode’s Report expressed concern over capitalisation rates stabilising at dizzy heights and not falling to pre-Asian crisis levels. The general fall in interest rates had not been accompanied by a concomitant reduction in capitalisation rates. Instead, capitalization rates are levelling off at higher than pre-Asian crisis levels. This is because the fall in interest rates has been neutralised by a buyer’s market created by institutions trimming their portfolios.
The gap in capitalization rates between prime CBD and decentralised office space widened even further, from 2,1% points in the previous quarter to 2,6% points. Editor Terri Sturrock says this is the result of the continuing rise of capitalization rates in the CBDs – even Cape Town’s, which had traditionally held its own. The rise reflects negative perceptions.
Capitalization rates are the property equivalent of the forward earnings yields of equity. Higher rates result in lower market values.
Good news is that the average escalation rate for industrial leasebacks has fallen to 10,3% — its lowest since 1989. Rode expects further declines, given the declining trend in inflation.
The report predicts that a stronger domestic economy is bound to stimulate demand for office space. Vacancies in the non-CBD areas are low, so the office market is set to experience strong upward pressure on real rentals in the near future.
As for decentralised office space, Pretoria leads the way with the highest real-rental growth rates, recording an average increase of 4,2%. Vacancy factors, as reported by Sapoa, have increased to 20,3% for Durban CBD offices and 6% for Durban decentralised areas, yet both CBD and decentralised rentals in Durban managed real rental growth.
Cape Town still has the lowest vacancy levels in metro areas. In spite of this, prime real rentals declined in the first quarter — the first time since 1996. This field highlights a growing concern that the Cape Town CBD may be the next to fall, unless drastic action is taken immediately.
Welcome relief came for landlords in 1999 in that operating expenses of office buildings across the country grew significantly slower than the core inflation rate. Johannesburg’s CBD outgoings actually contracted by 8,6% and Pretoria and Sandton’s increased by only 1% and 2% respectively.
Lower interest rates and improved consumer spending all point to higher business confidence levels in the economy, and hence improved prospects for the industrial property market. Demand for industrial space will be increasing soon as manufacturing production is recovering.
Moving to the residential market, previous flat owners must be eating their hearts out as the current incredible real rental growth is still on the up, some rates topping real growth of 20%!
Rode’s house price survey for quarter 1999:3 indicates that house prices on a national basis across all classes contracted further. The upper market especially was extremely volatile, heavily influenced by economic sentiment.
Homeowners still looking for that huge profit will again be disappointed. On a smoothed basis, nominal national house prices fell by 1% in quarter 1999:3 on a year earlier. In real terms, national house prices declined by a whopping 8,4% (when deflated by home building costs) or an amazing 6,8% (when deflated by core inflation).
Good news though is that, generally, market sentiment is up and prospects for the building industry are improving. A total of 30% more building plans were passed in the survey quarter. According to the Bureau for Economic Research, building activity in the residential sector is set to increase in the next quarter, while building activity in the non-residential sector will follow suit only in the second half of the year.
