Cape Town - Property investors won’t be jolly this festive season as property fundamentals continue to disappoint, according to the latest Rode’s Report on the South African property market.
South Africa’s property sector this year was estimated to be worth R4.9 trillion, according to Property Sector Charter Company.
General economic uncertainty has slowed demand for office space. The result is vacancy rates that are “obstinately” refusing to drop and market rentals that are at best showing feeble growth.
In the third quarter of 2012 nominal rentals in Johannesburg decentralised grew by 1%, while office rentals in the suburbs of Cape Town (-1%) and Durban (-4%) shrank.
Erwin Rode, of Rode & Associates, notes that irrespective of the region and assuming building-cost inflation is around 10%, real office rentals declined between 7% and 14%.
Weaknesses in the manufacturing and retail sectors - two key pillars of the industrial property market - are likely to continue to hinder demand and subsequently rental growth.
In the third quarter of 2012, nominal rentals on the East Rand, Central Witwatersrand, Durban and the Cape Peninsula were modestly up by between 4% and 4.5%.
Only capitalisation rates, which are the property equivalent of the forward earnings yield of equity, are holding their own on the non-residential front despite capitalisation rates continuing to move sideways in the third quarter of 2012.
In the past few quarters, the growth in flat rentals has started to accelerate. In the third quarter of 2012 flat rentals were, on a national basis, up by a yearly rate of 6%.
“This means investors still like income-producing property. This is so in spite of the pressure on cash flows owing to stubborn vacancy rates, poorly performing market rentals and fast-rising operating costs,” said Rode.
Rentals on houses could only achieve growth of about 4% while those on townhouses remained at roughly the same level they were last year. Consumer prices (excluding owners’ equivalent rent) showed growth of about 5%, showing that rentals were able to achieve real growth.
There are more factors likely to dampen house prices than those likely to support a price recovery. The return to growth in the value of new mortgage loans granted naturally bodes well for prices.
However, there are a few things that will slow house price growth:
• Consumer-price inflation is sitting close to the upper limit of the target range, diminishing the hope of an interest rate cut in the near future.
• Along with high household debt and tighter credit restrictions, weaker economic growth is likely to further stunt employment and disposable income growth.
• High housing prices in real terms will open the possibility of the continual development of new houses on the supply side.
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