Property markets still hibernating

26-07-2010

The property markets across the board are still in hibernation mode, according to the latest Rode’s Report on the State of the Property Market.

The lagged impact of the business cycle on the property market is especially evident in the offices segment. For instance, it is only the Durban decentralized areas that could attain any growth on a year ago (a nominal +5%) that exceeds the expected growth rate in building–cost inflation (at +2,6%). For Cape Town, Johannesburg and Pretoria, growth was, on average, below that of building-cost inflation, and real rentals are currently lower than they were a year ago.

Says Erwin Rode of property economists Rode & Associates: “Even in the industrial property market, where manufacturing activity and retail sales are said to be in recovery mode, the overall strength and stability of this recovery remains an uncertainty, particularly against the backdrop of both a South African economy that continues to shed jobs and a still-wobbly world economy.”

Such uncertainty in the industrial property market also extends to prospects for market rentals, with these rentals continuing to contract across the country (specifically in the Central Witwatersrand, Durban, Port Elizabeth and the Cape Peninsula).

Likewise, flat rentals in Durban and Cape Town could only achieve a nominal 1% growth in the first quarter, while Johannesburg and Pretoria rentals were at the same level of a year ago.

However, notes Rode, an interesting (and “premature”) phenomenon over the past few months has been the recovery in the growth of nominal house prices.

“After reaching its lowest point in the first half of 2009, yearly growth has accelerated to almost 14% in April, up from 12% in March, possibly due to easing credit standards,” says Rode. But, he warns, “Once the base effects have played themselves out, one can again expect house prices – especially in the lower-priced segments – to show more moderate growth rates. The reasons are household coffers that are still under pressure, job insecurity and house prices themselves that continue to remain high in real terms.”

Capitalization rates have remained at roughly the same levels at which they were at the end of last year. “The adjective that best describes this situation,” notes Rode, “is ‘stable’”. Capitalization rates are the property equivalent of the forward earnings yield of shares. “

Nevertheless, considering that market rentals of offices, industrials and malls are shrinking in real terms, this situation could eventually lead to investors requiring higher minimum income returns to invest in property, and this would tend to depress market values.”

However, because of low loan-to-value (LTV) ratios traditionally enforced by SA banks, landlords in South Africa are generally under little duress to sell. “This explains the extraordinary stability of the premium property market”, says Rode.

As for the retail-rental outlook, improved retail sales do augur well for market rentals from the demand side. However, the rise in the unemployment rate in the first quarter of 2010 does bring to question whether the increased willingness to spend — increased consumer confidence — will be matched by a much improved ability to spend. Added to this, a relatively large quantity— more than 300.000 m² — of new shop space is still expected to come on line in 2010, which might also put a damper on market rentals from the supply side.

Hence, shopping-centre landlords should be warned to be cautiously optimistic.