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Property market set to remain weak

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04 Jan 2013

It is not yet the season for South African property investors to be jolly as property fundamentals continue to stutter, according to a report.

House prices are still very high in real terms, thus making the continual development of new houses possible on the supply side.

The Rode Report Q4 2012 reveals that hindered by general economic uncertainty, growth in the demand for office space has not been forthcoming.

Vacancy rates are “obstinately” refusing to drop and market rentals that are at best showing feeble growth.

In Q3 2012, rentals in the Pretoria suburbs showed the best annual growth of 2 percent.

Nominal rentals in Johannesburg decentralised grew by 1 percent, while office rentals in the suburbs of Cape Town (-1 percent) and Durban (-4 percent) shrank.

Writing in the report, property valuer and economist Erwin Rode of Rode & Associates says irrespective of the region – and assuming building-cost inflation of roughly 10 percent – this implies that real office rentals declined by between 7 and 14 percent.

“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 percent, according to the report.

Rode notes that it seems only capitalisation rates are holding their own on the non-residential front as they continued to move sideways in the third quarter of 2012.

 “This means investors still like income-producing property and 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 percent, he points out.

Rentals on houses could only achieve growth of about 4 percent 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 percent, 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, he says.

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:

1.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)

2.Broad-based weaker economic growth (likely to further scupper employment and disposable-income growth)

3. Stubbornly high household debt levels and tighter credit standards to households

4.House prices are still very high in real terms, thus making the continual development of new houses possible on the supply side. 

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