Rental mar­kets still strug­gling, Rode re­port

Weekend Argus (Saturday Edition) - - PROPERTY -

AL­THOUGH the econ­omy has tech­ni­cally emerged out of the re­ces­sion, Rode’s Re­port on the Prop­erty Mar­ket for the fourth quar­ter 2009 re­veals that com­mer­cial, in­dus­trial and res­i­den­tial rentals con­tinue to feel the pinch of weak eco­nomic con­di­tions.

On the of­fice front, yearly growth in rental mar­kets have waned to be­low two per­cent in Joburg and Cape Town de­cen­tralised. How­ever, in Dur­ban de­cen­tralised (plus nine per­cent) and Pre­to­ria de­cen­tralised (plus 12 per­cent) the mar­ket was still sur­pris­ingly firm.

“The light on the hori­zon – at least for this sec­tor of the in­dus­try – is that over the same pe­riod build­ing cost inflation is ex­pected to have con­tracted by about two per­cent,” says prop­erty econ­o­mist Er­win Rode.

“This im­plies real rental growth – on the whole – in all of the de­cen­tralised ar­eas. The de­cline in build- ing costs re­flects the dire state of the build­ing-construction in­dus­try.

“How­ever, the ef­fects of softer eco­nomic ac­tiv­ity on the de­mand for in­dus­trial space – and con­se­quently its ef­fect on mar­ket rentals – are also be­com­ing ev­i­dent.”

While the best rental growth was recorded in the East Rand (five per­cent), the Cen­tral Wit­wa­ter­srand recorded two per­cent and the Cape Penin­sula one per­cent.

How­ever in cer­tain ar­eas, mar­ket rentals were even lower than a year ago – in Dur­ban (less five per­cent) and the West Rand (less 16 per­cent).

Com­ment­ing on the ef­fects th­ese re­sults are hav­ing on cap­i­tal­i­sa­tion rates (the prop­erty equiv­a­lent of the for­ward earn­ings yield of eq­uity – when cap rates rise, mar­ket val­ues tend to drop, and vice versa), Rode says the prin­ci­pal risk to the out­look for cap­i­tal­i­sa­tion rates re­mains the scaled-down ex­pec­ta­tions about the di­rec­tion of real rentals. This poten- tially could see prop­erty in­vestors re­quir­ing higher in­come re­turns from prop­erty be­cause of de­flated cap­i­tal re­turn prospects, thereby, sup­press­ing val­ues.

Flat rentals also con­tin­ued to show lack­lus­tre growth. Dur­ban man­aged what could be called the “best” yearly growth at five per­cent, whereas rentals in Joburg and Cape Town were up by two per­cent. For Pre­to­ria and Port El­iz­a­beth, rentals re­mained at the same level of a year ago. Th­ese low rental-growth rates also ap­plied to house rentals.

“As res­i­den­tial rentals have a heavy weight­ing of 16.4 per­cent in the Con­sumer Price In­dex, th­ese fig­ures are good news for inflation, as mea­sured by the CPI,” says Rode.

But Rode be­lieves it is too early to cel­e­brate as it re­mains un­likely that the re­cov­ery in nom­i­nal house prices will re­sult in a change in the di­rec­tion of real house prices any time soon. Rea­sons for this are:

The grim prospects for the coun­try’s fi­nances (which will put pres­sure on taxes). Ris­ing un­em­ploy­ment. House prices are in real terms very high. House­holds’ high debt lev­els. C o n s t r a i n t s o n e c o n o mi c growth through the elec­tric­ity de­ba­cle and the gloomy out­look for the world econ­omy.

Call Er­win Rode on 082 431 7193 or visit www.rode.co.za.

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