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Prognosis for property market remains weak

Prognosis for property market remains weak

19-12-2012

’Tis not yet the season for property investors to be jolly, as property fundamentals continue to stutter. This is the prognosis contained in the latest issue of Rode’s Report on the S.A. Property Market.

Hindered by general economic uncertainty, growth in the demand for office space has not been forthcoming. The result of this has been vacancy rates that are “obstinately” refusing to drop and market rentals that are at best showing feeble growth. In the third quarter of 2012, rentals in the Pretoria suburbs showed the best annual growth of 2%. Nominal rentals in Johannesburg decentralized grew by 1%, while office rentals in the suburbs of Cape Town (-1%) and Durban (-4%) shrank. Commenting on this, property valuer and economist Erwin Rode of Rode & Associates, notes: “Irrespective of the region – and assuming building-cost inflation of roughly 10% – this implies that real office rentals declined by between 7% and 14%.”

Weaknesses in the manufacturing and retail sectors — the two support pillars of the industrial property market — are likely to continue to place a lid on demand and, consequently, on 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%.

Indeed it seems only capitalization rates are holding their own on the non-residential front as they continued to move sideways in the third quarter of 2012. Comments Rode: “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.”

In recent quarters, the growth in flat rentals has started to accelerate to such as extent that in the third quarter of 2012 flat rentals were — on a national basis — up by a yearly rate of 6%. Rentals on houses could only achieve growth of about 4% while those on townhouses remained at roughly the same level they were a year ago. Over the same period, consumer prices (excluding owners’ equivalent rent) showed growth of roughly 5%, implying that flat rentals were at least able to show real growth.

At present there are more factors that are likely to weigh down and dampen house prices than factors likely to support a recovery in prices. The return to growth in the value of new mortgage loans granted naturally bodes well for prices. However, on the flip-side there are many things that will retard the growth in house prices. These are:

  • consumer-price inflation that is uncomfortably close to the upper limit of the target range (thus diminishing the hope of an interest-rate cut in the near future),
  • broad-based weaker economic growth (likely to further scupper employment and disposable-income growth),
  • stubbornly high household debt levels and tighter credit standards to households ─
  • not to mention the fact that house prices are still very high in real terms, thus making the continual development of new houses possible on the supply side.

Note to sub-editor: Capitalization rates are the property equivalent of the forward earnings yield of equity. When they rise, market values tend to drop, and vice versa.

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Rode & Associates (Pty) Ltd. complies with section 51 of the Promotion of Access to Information Act, no. 2 of 2000. Rode & Genote (Edms.) Bpk. voldoen aan artikel 51 van die Wet op die Bevordering van Toegang tot Inligting, nr. 2 van 2000. BEE certificate (PDF) |

Committed new office developments increasing steadily

Commited new office developments increasing steadily

27-11-2012

Even in the face of lacklustre demand for office space, uncertain economic conditions and jaded business sentiment, the number of committed new office developments is increasing steadily.

Office vacancy rates have been moving sideways since 2010. Contrary to what one might suspect intuitively, this was seemingly not only attributable to a lack of growing demand but also to an upward trend in committed new supply (see corresponding graph). In the third quarter of 2012, the amount of new committed developments was roughly 700.000m², 53% of which was still unlet.

But, the prospects for office space demand — which might affect the take-up of existing and new space — remain dull in the wake of disappointing employment figures. Considering the broad-based uninspiring growth in the economy, it came as no surprise that in the third quarter of 2012 the unemployment rate edged up to above 25%. The importance of conditions in the labour market to office property is illustrated by the graph that follows.

The graph shows the robust correlation between growth in total employment — as measured by Adcorp — and growth in office demand. In the reporting quarter, total employment grew by a yearly rate of just under 2%, while office demand showed growth of 0,2%. Over the period displayed in the graph, total employment growth explained roughly 70% of the growth in office space demand. This means that the demand for office space cannot be expected to grow in the face of poor employment conditions. What’s more, combine the continued uncertain economic growth prospects with low confidence levels amongst business decision makers, then the take-up of new developments might not be as robust as perhaps hoped for by the developers.

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Rode & Associates (Pty) Ltd. complies with section 51 of the Promotion of Access to Information Act, no. 2 of 2000. Rode & Genote (Edms.) Bpk. voldoen aan artikel 51 van die Wet op die Bevordering van Toegang tot Inligting, nr. 2 van 2000. BEE certificate (PDF) |

Property in the doldrums

Property in the doldrums

31-10-2012

Set against the backdrop of moderate economic activity and floundering business confidence, non-residential property fundamentals continue to struggle. This is according to property economist Erwin Rode in the latest issue of Rode’s Report on the S.A. Property Market.

Office and industrial vacancies are for now unable to drop while growth in nominal rentals is finding it hard to beat inflation. In fact, in the second quarter of 2012, only prime office rentals in Pretoria (+1%) and Durban (+1%) decentralized could muster some growth in nominal rentals. In both Johannesburg (-2%) and Cape Town (-1%) office rentals in the suburbs were on average slightly lower than a year ago.

Industrial rentals also continued to show moderate growth as South African manufacturing dwindles under international economic pressures. In the second quarter of 2012, industrial rentals on the Central Witwatersrand and in Durban were up by a modest 3%. In Port Elizabeth they stayed at roughly the same level as a year ago, while in the Cape Peninsula (-2%) they were marginally lower. In the reporting quarter, East Rand rentals recorded the highest growth rate of just below 7%.

Property economist Erwin Rode: “The disappointing performances of non-residential property vacancies and rentals do not bode well for capital return prospects. Yet, in the second quarter of 2012 the market’s ratings of non-residential property remained steady; this as capitalization rates stayed at roughly their previous-quarter levels.”

Residential rentals reflected the same trend visible in the non-residential sector; that is, moderate to weak growth. Nationally, nominal market rentals on flats and houses grew by 5% and 3% respectively, whereas those on townhouses showed no growth. Given consumer inflation of just below 6% over the same period, this implies that in real terms all categories of residential property rentals are contracting, thereby mirroring what is happening in the non-residential property sector.

For now, some life support for the ailing house market comes in the form of a seeming return to life of the mortgage market and a few other factors. After contracting for more than a year, the value of new mortgage loans granted for residential dwellings and flats has in recent months started to grow again. Says Rode: “The seeming recovery might be explained by low and steady interest rates, but also by the continued recent but unsustainable growth in disposable incomes.”

Note to sub-editor: Capitalization rates are the property equivalent of the forward earnings yield of equity. When they rise, market values tend to drop, and vice versa.

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Rode & Associates (Pty) Ltd. complies with section 51 of the Promotion of Access to Information Act, no. 2 of 2000. Rode & Genote (Edms.) Bpk. voldoen aan artikel 51 van die Wet op die Bevordering van Toegang tot Inligting, nr. 2 van 2000. BEE certificate (PDF) |

Slumping business confidence undermines building-construction activity

Slumping business confidence undermines building-construction activity

28-08-2012

Despite favourably low interest rates, a turnaround in fortunes for stakeholders in the building-construction industry should not be expected any time soon.

This is so when one considers business confidence levels that are taking a knock. Slumping sentiment amongst business decision-makers — representing the autonomous component of investment — could mean firms cutting back on additions to fixed capital, even if fundamental determinants of investment (such as real interest rates) have not changed. The correlation between changes in business confidence levels and the growth in building activity — growth in addition to the stock of residential and non-residential property — is shown in the graph that follows. The current poor showing of both residential and non-residential property fundamentals is, of course, not doing much to aid sentiment.

Similarly, there is a strong relationship between the growth in gross fixed capital formation (new capital investment in buildings, machinery and equipment) by private business enterprises and business confidence levels (second graph).

Considering that private business enterprises account for 60% of overall gross fixed capital formation, which in turn makes up 20% of the total expenditure on gross domestic product (GDP), continued weak sentiment amongst business decision-makers does not augur well for the economy.

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Rode & Associates (Pty) Ltd. complies with section 51 of the Promotion of Access to Information Act, no. 2 of 2000. Rode & Genote (Edms.) Bpk. voldoen aan artikel 51 van die Wet op die Bevordering van Toegang tot Inligting, nr. 2 van 2000. BEE certificate (PDF) |

Key drivers of office demand losing their oomph

Key drivers of office demand losing their oomph

24-07-2012

For now, no sudden improvement in the demand for office space can be expected as key demand drivers are losing their vigour. This is the opinion of property economist Erwin Rode in the latest issue of Rode’s Report on the S.A. Property Market.

Discouraging for the office demand and vacancy-rate outlook was the deceleration in output produced by the services sector (i.e. GDP of services) in the first quarter of the year. Says Rode of Rode & Associates, publishers of the Report: ”Waning growth of output in the services sector does not bode well for its employment prospects, which in turn implies continued weak demand for office space. Furthermore, slumping business confidence is another bad omen for office demand; this as businesses are unlikely to expand premises or hire new employees while confidence levels are low.”

Thus, unsurprisingly, in the first quarter of 2012, office vacancy rates remained stagnant leading to unimpressive rental performances. In the reporting quarter, the only rentals that could muster any growth at all were those in Pretoria decentralized (+0,5%). Market rentals in Johannesburg decentralized remained at the same level they were a year ago, while those in Cape Town (-1%) and Durban decentralized (-2%) contracted slightly.

Weaknesses in the manufacturing and retail sectors — the two support pillars of the industrial property market — are likely to continue to place a lid on demand and, consequently, on rental growth. In the first quarter of 2012, only the Central Witwatersrand (at a growth of +10%) was able to buck the trend of poor yearly growth in rentals. In other major industrial conurbations, such as the East Rand (+3%), Durban (+0,5%), the Cape Peninsula (-1%) and Port Elizabeth (-2%) rentals either showed poor growth or contracted when compared to a year ago.

On the residential front, the report reveals that nationally, rentals on flats and houses grew by 5% and 4% respectively, while those on townhouses lagged behind at only 1%. Meanwhile, house prices have shown mild yearly contractions for the first six months of 2012. This, notes Rode, is the largest contraction recorded since the 1980s: “House prices last significantly deflated during the first half of 2009, after which they rebounded.”

Finally, while it’s been a bumpy ride for capitalization rates over the past three years, the investment mood among direct (unlisted) investors remained fairly buoyant. Rode elaborates: “Even amid the uncertain economic times, property investors refused to panic and this was in part due to the fact that, despite an upward trend since 2008, non-residential vacancy rates are still below their early 21st century highs.” A property’s vacancy rate has a direct impact on the perceived risk to its potential income. This will in turn affect the required income return (capitalization rate) at which investors will be willing to trade property.

Note to sub-editor: Capitalization rates are the property equivalent of the forward earnings yield of equity. When they rise, market values tend to drop, and vice versa.

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Subscribe to our free newsletter, the "Rode Review"

Contact details

(+27) (0)21 946 2480 | MaxiCall: 0861 22 44 88
(+27) (0)21 946 1238
  info@rode.co.za

Rode & Associates (Pty) Ltd. complies with section 51 of the Promotion of Access to Information Act, no. 2 of 2000. Rode & Genote (Edms.) Bpk. voldoen aan artikel 51 van die Wet op die Bevordering van Toegang tot Inligting, nr. 2 van 2000. BEE certificate (PDF) |