Johannesburg - In spite of the technical
emergence of the economy out of the recession, the latest Rode report on
the property market reveals that rental markets in
particular continue to feel the pinch of weak economic conditions across the
commercial, industrial and residential arenas.
On the office front, Johannesburg and Cape Town decentralised have seen
yearly growth in rental markets wane to below 2%. However, in Durban
decentralised (+9%) and Pretoria decentralised (+12%) the market has still
shown surprising robustness.
According to property economist Erwin Rode, the light on the horizon - at least for this sector of the industry - is that over the same period building
cost inflation is expected to have contracted by about 2%. This implies overall real
rental growth in all of the decentralised areas, he says.
The decline in building costs reflects the dire state of the
construction industry.
However, the effects of softer economic activity on the demand for
industrial space - and the consequent effect on market rentals - are also
becoming strikingly evident.
On the Rode scale of 0 to 9, industrial
vacancies in the major industrial conurbations increased to between 2 and
3.5 during the third quarter, in turn equating to percentage vacancies of
roughly between 3.5% and 8.2%.
While the best rental growth was recorded in
the East Rand (5%), the Central Witwatersrand recorded a meagre 2% and the
Cape Peninsula 1%.
However in certain areas, market rentals were even lower
than a year ago - namely Durban (-5%) and the West Rand (-16%).
Commenting on the effects these results are having on capitalisation
rates, Rode notes: "The principal risk to the outlook for capitalisation
rates remains the scaled-down expectations regarding the direction of real
rentals. This potentially could see property investors requiring higher
income returns from property because of deflated capital-return prospects,
thereby suppressing values."
For the time being, capitalisation rates for non-residential property
types kept on moving sideways from their previous-quarter levels.
"This
means market values in the suburbs are stabilizing," says Rode.
The
exceptions are office buildings in the country's CBDs, where capitalisation
rates are spiking. The rising capitalisation rates in the CBDs illustrate
the principle that during tough times the second-best (measured by node or
quality of building) tend to fare the worst.
Flat rentals also continued to show lacklustre growth. Durban managed
what could be called the "best" yearly growth at only 5%, while rentals in
Johannesburg and Cape Town were up by a meagre 2%. For Pretoria and Port
Elizabeth, rentals remained roughly at the same level of a year ago. These
low rental growth rates also applied to house rentals.
The outlook for building activity also looks bleak, as building input
costs and tender prices continue to decelerate.
In the third quarter of
2009, real gross fixed capital formation in residential buildings contracted
by 8% (ie 8% fewer "bricks" were put in place), while growth in non-
residential building activity decelerated to 7% - its lowest yearly growth
rate in nearly four years.
There is some good news, however, with housing prices seemingly having
bottomed out in April.
But according to Rode, it's too early to celebrate as it remains
highly unlikely that the recovery in nominal house prices will result in a
change in the direction of real house prices any time soon.
The reasons for this include rising unemployment, high house prices in real terms, households' high debt levels as well as constraints on economic growth through the electricity debacle and the
gloomy outlook for the world economy.
-
I-Net Bridge