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Flat rentals outperform inflation – Rode Report

27-03-2018

Amidst serious political turmoil, the South African property market ended 2017 on a better footing, with industrial property and flat rentals managing to outpace inflation. It was also a great year for listed property, which was the best-performing traditional asset class after stocks, says Kobus Lamprecht, economist with property-economists Rode & Associates.

Listed property, however, started 2018 on a very low note, rocked by the Resilient stable débâcle, while the stronger rand has also played a role in the overall share-price decline.

Office market

Summarising the latest Rode’s Report on the SA Property Market, Lamprecht says the office market continues to struggle under a significant oversupply. In the fourth quarter of 2017, nominal market rentals in Johannesburg decentralized performed the best of the major cities, growing by 5% compared to the fourth quarter of 2016. Standouts in Johannesburg were Illovo (+17%), Parktown (+15%) and Rosebank (+8%). Sandton’s rentals managed to grow only 3%, due to new developments entering the market. Rental growth in Cape Town (+2%) and Durban (+1%) continued to be slow, while Pretoria recorded its first decline since 2011. This was largely due to a sharp fall in rentals in Menlyn, Centurion and Highveld Technopark, which together represent at least 40% of Pretoria’s office space.

In all of the major office regions office rentals declined in real terms, after adjusting for building cost inflation of about 6%. This is another way of saying that new developments are becoming ever less viable.

Industrial space

Most major industrial areas had a solid rental performance at the end of 2017, as can be seen in the chart. In the fourth quarter of 2017, nominal market rentals for prime industrial space (500m²) in the Cape Peninsula again performed the best of the four major industrial regions in South Africa, with yearly growth of 14%. Top areas in this region include Brackengate (R75/m²), Paarden Eiland/ Metro (R67/m²) and Woodstock/ Salt River/ Observatory (R66/m²). Rentals in Durban, Central Witwatersrand and the East Rand grew by 7%, 6% and 4% respectively. Durban remains the most expensive nationally, with an average rental rate of just below R60/m² for prime space of 500m².

The major industrial areas all have low vacancy rates below 10%. Vacancy rates in other industrial areas, such as Pretoria, Port Elizabeth, Bloemfontein and Nelspruit, average comparatively higher between 10% and 20%.

Residential

Flat rentals across South Africa grew by a yearly rate of 6,4% in the fourth quarter of 2017, just outpacing building-cost inflation and comfortably beating consumer inflation of just under 5%. It is difficult to read much into one quarter’s figure, says Lamprecht, but the fourth quarter was the first time that rental growth accelerated from the previous quarter since early 2016. The growth rate of flat rentals also outpaced the growth in house prices. Nationally, house prices gradually accelerated throughout 2017, with nominal growth peaking at 4,9% in the fourth quarter, before slowing again in early 2018 (source: FNB). For now, Cape Town remains the only major city where house prices are beating inflation. The drought appears not to have had much impact on Cape Town’s house prices yet, but it remains a threat should winter rains disappoint again and the much-talked-about “Day Zero” arrives.

For more information, please contact Kobus Lamprecht on 021 946 2480 or send e-mail to kobus@rode.co.za