Steady vacancies signal slight reprieve for office rentals

08-11-2010

The latest Rode’s Report on the SA Property Market reveals that the upward march of office vacancies is seemingly losing momentum. This, says editor John Lottering, holds out hope for office landlords that market rentals will soon stabilise.

In fact, in the second quarter of 2010, an improvement in the growth of market rentals was already observed, with Durban decentralized (+10%) leading the way. In decentralised Johannesburg (+3%) and Pretoria (+2%) better rental growth was also recorded, while in contrast, oversupplied Cape Town decentralized still registered a decline (-5%).

As for industrial property, market rentals for prime industrial property continued to shrink. In the Central Witwatersrand (-5%); in Durban (-6%); in the Cape Peninsula (4%) and in Port Elizabeth (-7%) market rentals were all lower than a year earlier.

Despite deflating building-construction costs (-5%); the poor performance of nominal rentals still meant contracting real rentals in all of these industrial conurbations, barring the Cape Peninsula. Here, real rentals managed to stay at roughly the same level they were a year ago.

Lottering’s research also reveals that capitalization rates are not expected to move decisively in either direction. Capitalization rates are the property equivalent of the forward earnings yield of shares.

“There are two opposing forces at work here,” says Lottering. “On the one hand, real market rentals have been performing poorly over the past few quarters, thus potentially exerting upward pressure on capitalization rates. On the other hand, inflation prospects remain benign, thus putting downward pressure on long-bond yields – in turn regarded as a substitute asset class to property.”

On the residential side, flat rentals continue to show unimpressive growth. “In fact,” says Lottering, “had it not been for the relief brought to debt-service payments by falling interest rates, many more buy-to-let investors would now be struggling.”

Likewise, the momentary acceleration of house prices has now come to an end, with prices ─ after having accelerated to 13% off a low base in April this year ─ cooling off to as low as 3% (year on year) by September 2010. In fact, since May house prices have actually been declining month on month.

Says Lottering: “This is not surprising, because we still regard house prices as being too high in real terms, not to mention the high indebtedness of consumers, the employment situation, the effect of the National Credit Act, and ever-rising electricity tariffs.”

And the situation does not look set to improve much in the foreseeable future either, says Lottering: “Add to the current economic circumstances the fact that taxpayers may well be facing income-tax hikes next year, ongoing hikes in assessment rates in many municipalities, and the imminent introduction of expensive road tolling in Gauteng.”