Property market’s fairytale continues
09-06-2005
The non-residential property market continued to gain momentum during the first quarter of 2005, while house prices, although losing further steam, were still growing at remarkable rates. So say property valuers and economists, Rode & Associates, in their latest Rode’s Report on the South African Property Market.
The report notes that investors’ thirst for retail, office and industrial property resulted in a further fall in capitalization rates. Capitalization rates — the non-listed property sector’s equivalent of the forward earnings yield of shares — decline when prices rise. “Buyers’ willingness to pay more for non-residential property is largely based on their rosy prognosis for property fundamentals, as well as their expectation of continued low inflation”, says Garth Johnson, editor of the report. Even better news may be the fact that capitalization rates still have some way to go to reach the levels that reigned before 1997, implying potential windfall capital profits for current investors — the exception being fully-priced regional shopping centres.”
Referring to the listed property market, Johnson notes that the fact that Property Unit Trust and bond yields have been at similar levels since the last quarter of 2004, indicates that investors are expecting a good showing from non-residential property. “As property is regarded as a more risky investment than bonds, this convergence is a sign that there is a general expectation that non-residential property fundamentals will strengthen during the next year or more, leading to acceptable returns.” Furthermore, the steep fall in listed funds’ income yields is expected to give fund managers the freedom to pay more for property and, in the process, pull capitalization rates down.
The first quarter also saw a further decline in leaseback escalation rates — leases with a period equal to or exceeding 10 years — which Rode expects to continue as long as low inflation remains a priority of the Reserve Bank and, even more important, the market believes so too.
On the whole, decentralized office rentals were still slightly lower than they were a year ago, while CBD rentals grew by a not inconsiderable 8% over the same period, albeit off a lower base. The Cape Peninsula deserves special mention, as not only did the Cape Town CBD put in the best performance amongst the country’s inner cities, but prime office rentals in the decentralized nodes of Tyger Valley and Claremont were also amongst the top performers of the decentralized nodes during the first quarter.
Johnson says that with office vacancies in many nodes currently at ‘normal’ levels, and economic growth expected to remain buoyant, rentals could start climbing ‘aggressively’ at any moment. Office developers have anticipated this as is suggested by the number of new building plans passed during the last year.
On the whole, industrial rentals during the first quarter of this year were substantially up on the same period last year. However, even though nominal industrial rentals have grown robustly, real rentals (nominal rentals adjusted for building-cost inflation) are still battling to turn the corner as a result of double-digit building-cost growth. Rode expects that the sound state of the local economy, coupled with low industrial vacancies and rising building costs, will continue to drive industrial rentals north.
Rode notes that the increase in the number of shopping centres and, in particular, office plans passed during the last year, will progressively result in more building activity during the year. This will continue to exert upward pressure on building-cost inflation — which was already around the mid-teens during the first quarter of this year — and will allow contractors to stretch their profit margins further.
Moving on to the residential market, the report notes that even though house-price growth is decelerating, it still grew at an astonishing rate during the first quarter. Also interesting was the fact that existing-house prices continued to grow at more than double the rate of new-house prices. “This is not unexpected as there is normally a lag between accelerating demand and the time it takes for supply to catch up. However, the situation may be exacerbated by bottlenecks at municipalities that are preventing developers from rolling out new developments fast enough to meet demand”, says Erwin Rode, CEO of Rode & Associates. The report further notes that with house-price growth having exceeded disposable income growth for a number of years, and the interest rate cycle believed to be close to its trough, the prices of lower-priced houses are likely to continue growing faster than those of middle- and upper-priced houses.
Although residential building activity is likely to lose some steam on the back of slowing house-price growth, it is sure to remain strong for the remainder of the year, which will keep residential building costs in double-digit territory.
In the flats market it is interesting that fifteen years ago the levels of rentals in all the metros were roughly similar. Since 1995, however, Port Elizabeth’s flat-rental growth, and to a much lesser extent, that of Pretoria, started lagging behind the rental growth in the rest of the country. Durban was not left unscathed either, and in the late 1990s its rental growth also started to lag behind that of Johannesburg and Cape Town. “In the last two years, however, we have seen Durban’s and Port Elizabeth’s rentals growing at a double-digit rate. The upshot is that, today, a standard-quality 1-bedroom flat in Durban, Cape Town and Johannesburg costs, on average, R2.000/month. In Pretoria the same flat is somewhat less at R1.600/month, whereas in Port Elizabeth it is even lower at R1.500/month”, says Johnson. Enquiries: Garth Johnson at 021 946 2480
