Office rentals continue to manage growth

Johannesburg - Office rentals were able to muster some growth, even against the headwinds of a slowing economy, according to the latest Rode's Report on the SA Property Market.

Although by no means vigorous, growth in market rentals in Johannesburg (+5%), Durban (+4%) and Pretoria (+3%) decentralized still managed to outperform building cost inflation (0%), the Rode's fourth quarter 2010 report indicates. The only exception to be found came from Cape Town decentralized (-4%), where market rentals continued to contract.

Disappointing from an industrial-property point of view was the weakness in the manufacturing sector during the reporting quarter.

Property economist Erwin Rode said: "This, given industrial property's reliance on a strong manufacturing sector, could mean more downward pressure on market rentals.

"The best rental figures that could be achieved during the third quarter of 2010 came from Port Elizabeth, with only a modest +1% growth, followed by the Cape Peninsula, which actually showed zero growth. On the Central Witwatersrand (-4%) and in Durban (-5%) contractions in market rental were still observed."

The report also reveals that capitalisation rates seem to be benefiting from benign inflation expectations, inflows of foreign portfolio capital and their positive impact on bond yields and, hence, required minimum income returns on substitute investments.

"However," says Rode, "doubts about the sustainability of rises in market-rental growth, combined with rising municipal charges, are probably exerting a counter-balancing influence on capitalisation rates. With these forces in equilibrium, capitalisation rates were thus either marginally up or down when compared to the previous quarter."

On the residential front, while flat rentals have started to show modest signs of an acceleration in yearly growth.

Nominal flat rentals in Durban, Cape Town and Bloemfontein were up by 3%, roughly in line with the growth rate of consumer inflation (excluding housing). However, in Johannesburg (+1%), Pretoria (+1%) and Port Elizabeth (-1%) growth in nominal rentals was unable to keep up with inflation.

As for house prices, affordability of houses remains the biggest constraint to effective demand.

"Here one only has to consider the effect of the National Credit Act, the still-high levels of real house prices, job uncertainty, the high indebtedness of consumers and the much steeper electricity tariffs," Rode says.

In addition, taxpayers seem to be facing income tax hikes next year (if only through bracket creep), not to mention the ongoing escalation of assessment rates in many municipalities.