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Monday Oct 24, 2011

Commercial property hit by lack of business confidence

For now, no improvement in the demand for office space is detectable, according to the latest issue of Rode's Report, which is sponsored by FNB.

Erwin Rode, property economist and publisher of the report, says uncertain economic conditions are obviously affecting business confidence and must be making firms think twice about expanding their premises or hiring new staff.

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

He says growth in office rentals waned in the second quarter of 2011, after starting the year with vigour. On a national basis, office rentals mustered growth of 5 percent year-on-year. This comes after having recorded robust growth of 9 percent in the previous reporting quarter.

As for industrial property, in the second quarter of 2011 strong rental growth of 8 percent was observed in the Cape Peninsula, but this was the exception.

More pedestrian growth rates were notched up in Durban (3 percent), the Central Witwatersrand (2 percent) and Port Elizabeth (1 percent).

Rode says: "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.

"Lacklustre growth is also evident in buy-to-let residential property. In the second quarter of 2011, house rentals nationally mustered yearly growth of only 1 percent, and townhouse rentals remained at roughly the same levels of 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 dropping.

"Having said this, 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, and are indirectly affecting tenants' ability to afford rental increases.

"Nevertheless, for now landlords can comfort themselves with the knowledge that interest rates on their mortgage bonds are at record lows, and there is little upward pressure on rates for the time being."

Rode predicts that prospects for capital appreciation in the housing market will remain feeble, in line with the stillovervalued house market and weakness in residential mortgages.

"After peaking in the first half of 2010," says Rode, "the yearly growth in the value of new mortgage loans has turned down sharply, 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 price movements."

John Loos, FNB property sector strategist says: "For a while we have seen the 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-onquarter annualised rate to 1.3 percent.

" Looking forward in the near term, weak readings in the Reserve Bank leading business cycle indicator suggest further weakness in economic growth. In addition, no further interest rate stimulus has been forthcoming in 2011.

"The recent global and local economic weakness has the ability to exert pressure on commercial property values in two ways. First, a slow economy could lead to increased vacancy rates. Second, investor flights to 'safe haven' investments has resulted in capital outflows, which have led to 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 thus have the potential to undermine commercial property values."

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