Office rentals continue to manage growth despite strong economic headwinds
29-12-2010
According to the latest Rode’s Report on the SA Property Market (quarter 2010:4); office rentals were able to muster some growth, even against the headwinds of a slowing economy.
Although by no means vigorous, growth in market rentals in Johannesburg (+5%); Durban (+4%) and Pretoria (+3%) decentralized still managed to outperform building cost inflation (0%). The only exception to be found came from the Cape Town decentralized (-4%); where market rentals continued to contract.
Disappointing from an industrial-property point of view was the weakness in the manufacturing sector during the reporting quarter.
Comments property economist Erwin Rode: “This, given industrial property’s reliance on a strong manufacturing sector, could mean more downward pressure on market rentals. The best rental figures that could be achieved during the third quarter of 2010 came from Port Elizabeth, with only a modest +1% growth, followed by the Cape Peninsula, which actually showed zero growth. On the Central Witwatersrand (-4%) and in Durban (-5%) contractions in market rental were still observed.”
The report also reveals that capitalization rates seem to be benefiting from benign inflation expectations, inflows of foreign portfolio capital and their positive impact on bond yields and, hence, required minimum income returns on substitute investments.
“However,” says Rode, “doubts about the sustainability of rises in market-rental growth, combined with rising municipal charges, are probably exerting a counterbalancing influence on capitalization rates. With these forces in equilibrium, capitalization rates were thus either marginally up or down when compared to the previous quarter.”
On the residential front, while flat rentals have started to show modest signs of an acceleration in yearly growth.
Nominal flat rentals in Durban, Cape Town and Bloemfontein were up by 3%, roughly in line with the growth rate of consumer inflation (excl. housing). However, in Johannesburg (+1%); Pretoria (+1%) and Port Elizabeth (-1%) growth in nominal rentals was unable to keep up with inflation.
As for house prices, affordability of houses remains the biggest constraint to effective demand. Here one only has to consider the effect of the National Credit Act, the still-high levels of real house prices, job uncertainty, the high indebtedness of consumers and the much steeper electricity tariffs. In addition, taxpayers seem to be facing income-tax hikes next year (if only through bracket creep); not to mention the ongoing escalation of assessment rates in many municipalities.
Note: Capitalization rates are the property equivalent of the forward earnings yield of equity. When they rise, market values tend to drop, and vice versa.
