Commercial property recovery fails to take off in 2011
The commercial real estate market maintained modest growth over 2011, producing a 10.4 percent total return according to the SA Property Owners Association/ Investment Property Databank Sapoa/IPD) property index.
This subdued result marks a softening in the market from the mini- recovery in 2010 - which delivered a 13.4 percent return - but it is still an improvement over 2009.
Uncertainty in global markets, weak local demand and slowing consumer confidence resulted in muted capital growth of just 1.4 percent, and income returns were steady at 8.9 percent. Results improved marginally in the latter half of 2011, however.
Concerns remain, though, particularly over the health of secondary markets. Even at a national level, fundamentals are placing downward pressure on rentals and bottom line returns. Vacancies rose from 6.6 percent to 6.9 percent, rental growth reduced to 6.2 percent and at the same time rental yields softened by 36 basis points to 9.6 percent.
A sharp convergence in growth across the main market sectors highlights the increasingly important impact of macro forces and high uncertainty on the property market. Quality and location are playing a greater role in differentiating property returns.
Retail property once again proved its resilient nature with the strongest capital growth of the three main sectors for the t hird consecutive year. Its 10.1 percent total return was comprised of 8.3 percent income return and 1.6 percent capital growth, boosted by relatively strong retail sales as consumers continued to spend.
Overall , however, the growth in trading density fell below inflation and the outlook is for a continued moderation i n consumer spending. An increase in vacancies to 6 percent also put pressure on rental values, resulting in a corresponding weakening of rental growth.
As a whole, the office sector managed just 1.3 percent capital growth over the year, which combined with a 9.7 percent income return produced an 11.2 percent total return. This figure, however, masks a wide range of results in the office sector, with quality and location generally underlying the ultimate differences. Better quality offices were able to drive higher rental growth from vacancies lower than the national average of 12.1 percent.
Industrial property managed the highest total return of the three sectors with 11.9 percent, although the income return of 10.4 percent is much more significant than the 1.4 percent capital growth. Industrial vacancies continued on their downward trend, and at the end of 2011 were just 4.3 percent.
The SA results reflect a growing loss of momentum in global property markets in the wake of dampened sentiment, particularly across Europe. Outside Europe, returns improved slightly in Canada, Australia and the US.
Stan Garrun, managing director of IPD South Africa, says: "The results confirm the impact of global economic instability and subdued conditions locally, on SA property investment performance.
"On top of this, high operating costs and a serious mismatch between demand and supply are taking their toll on returns.
"Although these figures don't necessarily point to further recessionary conditions, they do indicate that it is a long haul back to pre-2008 levels. The good news is that prime assets are performing well in all sectors. Any economic uplift should quickly release major new income growth for tenants and landlords, as well as a pent-up property development pipeline."
Despite the moderation in direct property returns in 2011, it nevertheless outperformed most other major asset classes. While property unit trust listed property funds returned 12.2 percent, compared to 10.4 percent for direct property, property loan stock listed property funds only managed 7.7 percent. Equity markets and bonds returned 2.6 percent and 10.1 percent respectively.
Garrun says 2012 is the 15th year in which IPD has released a property investment index in SA. "The index has grown exponentially in this time, coincident with a growing property market and development of a sophisticated mix of investment vehicles, including a large and highly competitive listed property sector."
Weekend Argus (Saturday Edition)