Rental markets still struggling according to Rode report

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 building 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 potentially 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: