The state of the SA property market

South Africa is currently seeing poor office demand, wariness about support pillars of the industrial sector and weaker mortgage lending restraints.

According to property brokers in Durban, the decentralised office market is likely to face tougher times as speculative developments in the La Lucia Ridge and Umhlanga area are expected to put downward pressure on market rentals.

This is according to Erwin Rode, chief executive officer of Rode & Associates, property economist and publisher of the Rode’s Report.

Speaking at the FNB Commercial Property Finance & Rode’s Report quartely review, he said uncertain ecomomic conditions are obviously affecting business confidence.

“Firms must think twice about expanding their premises or hiring new staff.”

He said the result will no doubt be a continued lacklustre demand for office space to rent and for now, moderate growth in rentals remains the most likely outcome.

Writing in the Rode’s Report for the third quarter, Rode explains that the growth in office rentals waned in the second quarter of 2011.

On a national basis, office rentals mustered growth of 5 percent year on year from 9 percent in the previous reporting quarter.

At the regional level, rentals in Pretoria recorded +7 percent and Johannesburg +6 percent decentralised showing the strongest growth.

The Pretoria decentralised office node of Centurion recorded the best rental growth of +8 percent, Menlyn recorded growth of 2 percent, Hatfield -2 percent and Brooklyn/Waterkloof – 5 percent rentals decline compared to a year earlier.

In Cape Town, decentralised rentals showed growth of 3 percent and Durban -5 percent rentals lower than they were a year ago.

He says Cape Town decentralised office nodes of Claremont (13 percent) and Century City (10 percent) have been struggling with double-digit vacancy rates for a while now.

Market rentals in Century City were down by 8 percent, Claremont contracted by 1 percent and Tyger Valley went up by 1 percent.

In Berea and Westway in Durban, rentals were down by about 9 percent and 4 percent respectively while top office areas of La Lucia Ridge rentals were down by 1 percent.

Erwin says a closer look at Johannesburg decentralised shows robust growth in popular nodes such as Sandton CBD (+11 percent), Parktown (+10 percent) and Bryanston.

In Illovo and Rivonia, rentals were up by 4 percent and 2 percent respectively while in Rosebank (-2 percent) and Randburg Ferndale (-6 percent) market rentals were lower than they were a year ago.

“The poor perfomance of the Rosebank and Randburg Ferndale is related to the fact that grade–A office vacancies in these two nodes are currently sitting at 15 percent,” says Rode.

He says Rosebank’s high vacancy could be atrributed to the over-zealous developing linked to the Gautrain station whereas Randburg’s malaise relates to the general lack of demand.

In Q2 2011, strong industrial rental growth of 8 percent was observed in the Cape Peninsula followed by Durban (+3 percent), the Central Witwatersrand (+2 percent) and Port Elizabeth (+1 percent).

“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.”

Rode says there is nothing much for buy-to-let residential property investors to be pleased about.

According to the report, flat rentals in Durban recorded the lowest growth rate of just under 2 percent over the past year. Cape Town and Johannesburg flat rentals were up by about 4 percent and 2 percent respectively and Pretoria at 6 percent, was the only major city in which flat rentals were able to beat the consumer inflation.

In Q2 2011, house rentals recorded a yearly growth of only 1 percent 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 percent.

“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.”

He says 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.

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, he says.

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 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 house price movements, he says.

Erwin says compared to industrial and offices that are currently cheaper to buy, houses are expensive.

Would-be home buyers will be put off by the pricey homes in the market coupled with costs associated with owning a home.

On listed property, the Rode’s Report revealed that the cash flow of listed property will grow albeit moderately in contrast to fixed-income bonds. Listed property is said to be expensive .

Distribution growth has been decelerating to about 5 percent in August from 9 percent in January.

John Loos, FNB Home Loans property strategist notes for that the South African economy has experienced signs of global and domestic economic slowdown.

South Africa’s real gross domestic product (GDP) growth slowed significantly in the second quarter from a previous 4.5 percent quarter-on-quarter annualised rate to 1.3 percent.

Loos says the recent global and local economic weakness has the ability to exert pressure on commercial property values in two ways.

Firstly, a slow economy could lead to upward pressure on vacancy rates. Secondly, investor flights to “safe haven” investments has resulted in a degree of capital outflows, resulting in recent rand weakness and rising domestic long-bond yields.

The possible combination of higher vacancy rates and higher bond yields can exert upward pressure on, especially, the income yields of listed property, and to a lesser degree on the capitalisation rates of directly-held property.

“These developments have the potential to undermine commercial property values,” he says.

FNB is eyeing the industrial property market and will target sought-after locations in Gauteng, Polokwane and the rest of the country including some small towns.

Despite the gloom and doom in the South African property market, FNB says it is still lending responsibly of course and taking a 10 year view on the sustainability of the business and property fundamentals.

According to Tienie Strydom, FNB Commercial Property Finance provincial head for Gauteng, they are currently operating under volatile conditions.

However, he says FNB is open to lending to investors and would-be buyers of commercial property.

The bank is eyeing the industrial property market and will target sought-after locations in Gauteng, Polokwane and the rest of the country including some small towns.

Strydom explains that the bank is seeing a lot of owner-occupied business buyers seeking finance to buy their own properties.

“FNB’s share market in the commercial space is relatively low and we intend growing our business while lending in line with the National Credit Act.” – Denise Mhlanga

Readers' Comments Have a comment about this article? Email us now.