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Office demand still taking a siesta


For now, no improvement in the demand for office space is detectable, this according to the latest issue of Rode’s Report on the State of the South African Property Market (2011:3).

Explains Erwin Rode, property economist and publisher of the Report: “Uncertain economic conditions are obviously affecting business confidence and must be making firms think twice about expanding their premises or hiring new staff. The result will no doubt be a continued lacklustre demand for office space to rent and thus, for now, moderate growth in rentals remains the most likely outcome.” Evidence in support of the importance of the services sector to the office market is illustrated in the graph which follows. The graph shows the robust tendency for the growth in output produced by the services sector and the growth in the demand for office space (net of the growth in stock) to move together over time. Evident from the graph is that net annual growth in demand for office space was still negative in the second quarter of 2011.

In fact, after starting the year off with vigour, the growth in office rentals waned in the second quarter of 2011. On a national basis, office rentals mustered growth of 5% year on year. This comes after having recorded robust growth of 9% in the previous reporting quarter.

As for industrial property, in the second quarter of 2011, strong rental growth of 8% was observed in the Cape Peninsula, but this was the exception. More pedestrian growth rates were notched up in Durban (+3%); the Central Witwatersrand (+2%) and Port Elizabeth (+1%). Explains Rode, “Wariness in the manufacturing and retail sectors – the support pillars of industrial property – now raises an amber flag on demand prospects and, consequently, market rentals.”

Lacklustre growth is also evident in the buy-to-let residential sphere. On a national basis, in the second quarter of 2011, house rentals mustered yearly growth of only 1%, while rentals of townhouses remained at roughly the same levels they were at a year ago. Flat rentals performed best, with growth of only 3%. Some pleasant news for investors in the buy-to-let market is that, after peaking at the end of 2009, flat vacancies have since been edging southwards. Having said this, landlords might still feel hard done by, owing to the adverse impact of sharp rises in property taxes. Hikes in electricity tariffs, although normally not a direct cash outflow for residential landlords, are putting pressure on their tenants’ household cash flows, thereby indirectly affecting tenants’ ability to afford rental increases. Nevertheless, for now, landlords can comfort themselves in the knowledge that interest rates on their mortgage bonds are at record lows, and that there is little upward pressure on rates for the time being.

Rode predicts that prospects for capital appreciation in the housing market will remain feeble, in line with the still-overvalued house market and weakness in the residential-mortgage market.

“After peaking in the first half of 2010,” says Rode, “the yearly growth in the value of new mortgage loans has turned sharply south, and the value of new loans granted in June 2011 was actually lower than a year ago. Naturally, contractions in mortgage loans granted act as a restraining factor on price movements.”

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