The state of the SA property market as in quarter 2001:3
The listed property sector’s market capitalization is set for strong growth in the next two to three years as the market values of the listed and directly-held sectors have just converged.
The growth is expected to come primarily from new players entering the listed property market, but also from existing funds enlarging their portfolios.
Rode’s Report editor Dirk De Vynck says in the latest issue of this authoritative publication that directly-held property’s capitalization rates and property unit trust (PUT) yields have now converged, implying that the valuation discount of PUTs has been wiped out.
As recently as August 2001 this discount still stood at 9%. “Hence, we can state that listed values are as of now fair value compared with directly-held market values. The implication of this convergence is that there will be a deluge of listings of directly-held property portfolios. Listing provides owners with liquidity and, given the convergence of values, no capital losses should be suffered by fairly-valued portfolios on listing.”PUTs have put in a solid performance on the JSE with returns of 28%, 42%, 22,5% and 14,5% over 1, 3, 5 and 10 years respectively. These before-tax returns outperform those of the JSE’s AllShare and F&I indices over these periods.
In general, the property market started showing signs of slowing down in the third quarter of 2001, an indication that the weakening global and SA economies were starting to take their toll. The slowdown was noticed in especially the office and industrial markets, where rentals started levelling off.
Capitalization rates are still moving sideways. These are the property equivalent of the forward earnings yields of shares, and as such reflect investor perceptions regarding growth prospects and risk. On a relative basis, Cape Town still has the lowest capitalization rates for industrial leasebacks and CBD offices. This means Cape Town is the darling amongst investors.
The deterioration in the CBDs has hit office capitalization rates in these areas hard. An average national capitalization rate of 15,8% for grade-A was recorded for CBD offices in quarter 2001:3.
Office rentals in the prime decentralised office nodes showed signs of slowing down in quarter 2001:3 after their solid performance since 1995. This can be the first sign that the oversupply that exists in some of the major cities’ decentralised nodes is starting to take its toll on rentals.
On average, Cape Town decentralised is still achieving superior office rental levels compared to the rest of the country. Pretoria decentralised, on the other hand, has been the worst performer over the last 7½ years. In the decentralised nodes, takeup (growth in demand) remains strong. Hence, rising vacancies can only be attributed to overenthusiastic developments.
Turning to the industrial market, De Vynck says in a healthy and mature economy one would expect real rentals to trend sideways over the full, long property cycle, provided building costs are used as deflator (indicator of inflation).
“The fact that real rentals have been trending down in most cities (excluding Cape Town) for many years, suggests that the manufacturing industry is battling or rationalising with a vengeance. Even rentals in the Cape Peninsula, in relative terms the best performer since 1995, seem to be losing momentum owing to a growing vacancy.”
Flat rentals had a mixed performance in the quarter under review, although growth was experienced in all the surveyed regions. This especially applies to Pretoria, the front runner in quarter 2001:3, with average nominal growth of 20,6% compared to the same period the previous year.
He says house prices continue to benefit from the lower interest rates, with lower-priced suburbs also starting to show real growth. The latest available figures from Rode’s indices (quarter 2001:1) show that the exuberant growth in upper and middle-priced suburbs experienced after the Asian crisis could be at an end. Still, it is expected that houses in these price classes will continue to show real growth.
The trend in national house prices, as measured by Rode’s House Price Indices, shows that national house prices in all the price classes have not been able to keep up with inflation over the last decade, thus declining in real terms. However, this does not apply to Cape Town.
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