News Release: Rode’s Report for quarter 2000:3

State of the Property Market by Rode

A dramatic turnaround in office rental rates nationally and excellent returns on property unit trusts are boding well for the industry, says property economists Rode & Associates in their third quarter State of the Property Market report.

The report shows that, surprisingly, both CBD and decentralised office rentals nationally have shown excellent growth and that vacancies are declining.

Report editor Khalid Mohamed is upbeat about property prospects and says further improvement in the domestic economy and further drops in vacancy levels are good cause for even more optimism.

In decentralised nodes, grade A real office rentals have grown by 8,6 percent on a year earlier. Real CBD rentals increased by a heartening 5,0 percent, as a result of shrinking office vacancies.

The suburbs of Johannesburg and Cape Town have registered the largest fall in office vacancy levels for grades A+, A and B office buildings.

Industrial vacancies are also tumbling in the major industrial areas. Hence, strong industrial rental growth can be expected next year.

Other good news is that property unit trusts (PUTs) have outperformed the financial & industrial and all-share indices over both one and two years for lump sum investments. Mohamed says the June 30 figures show that for one-year lump sum investments, the property trust index delivered a return of 24,4%, while the financial & industrial index only managed a return of 7%. The all-share index clocked 12,0%.

Given that economists expect stable, yet moderate, growth in the economy over the next few years, investors can look forward to healthy real property returns in the better areas.

Listed property dividend streams are chugging along at a growth rate of about 6% p.a. Low vacancies, accelerating demand and the resultant rising rentals should underpin this momentum for the next couple of years.

But while generally an air of optimism prevails following booming office rentals, CBD shop rentals (with the exception of Pretoria) are sadly still sliding.

Rode CEO Erwin Rode says whether this is cyclical or not remains to be seen. “Post-apartheid South Africa has not delivered, and cannot deliver, on promises of a better life for all. There are simply too many constraints on the SA economy.”

Added to these woes, Rode predicts that AIDS is going to have a devastating effect on the economic and social well-being of the CBD customers.

Mohamed says capitalization rates haven’t changed much compared to last quarter. “These are closely linked to market sentiment and business confidence. We find that the effect of the fall in interest rates has been neutralised by institutions continuing to trim their property portfolios.”

He says that only once institutions have completed their restructuring exercises, or started listing their properties, will capitalization rates drop slightly.

Flat rentals have followed a strong upward trend since 1994, and are presently growing at about 20%. This made flat ownership a good investment during the 1990s. However, the rate of increase in rentals seems to be decelerating.

With the SA economy (hopefully) picking up, a period of sustained real growth can soon be expected for house prices. This will put an end to a near-uninterrupted decade of real-price contraction in the residential market.

The building industry continues to face pressure and as a result the industry finds itself in a state of despair. However, flat completions are showing phenomenal growth, convincingly outperforming house and townhouse construction.