South African commercial property sector continues to struggle

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Rode & Associates CEO Erwin Rode Rode & Associates CEO Erwin Rode

Set against the backdrop of moderate economic activity and floundering business confidence, SA’s commercial property sector continues to struggle.

This is according to property economist Erwin Rode in the latest issue of Rode’s Report on the S.A. Property Market.

Office and industrial vacancies are for now unable to drop while growth in nominal rentals is finding it hard to beat inflation. In fact, in the second quarter of 2012, only prime office rentals in Pretoria (+1%) and Durban (+1%) decentralized could muster some growth in nominal rentals. In both Johannesburg (-2%) and Cape Town (-1%) office rentals in the suburbs were on average slightly lower than a year ago.

Industrial rentals also continued to show moderate growth as South African manufacturing dwindles under international economic pressures. In the second quarter of 2012, industrial rentals on the Central Witwatersrand and in Durban were up by a modest 3%. In Port Elizabeth they stayed at roughly the same level as a year ago, while in the Cape Peninsula (-2%) they were marginally lower. In the reporting quarter, East Rand rentals recorded the highest growth rate of just below 7%.

Property economist Erwin Rode: “The disappointing performances of non-residential property vacancies and rentals do not bode well for capital return prospects. Yet, in the second quarter of 2012 the market’s ratings of non-residential property remained steady; this as capitalization rates stayed at roughly their previous-quarter levels.”

Residential rentals reflected the same trend visible in the non-residential sector; that is, moderate to weak growth. Nationally, nominal market rentals on flats and houses grew by 5% and 3% respectively, whereas those on townhouses showed no growth. Given consumer inflation of just below 6% over the same period, this implies that in real terms all categories of residential property rentals are contracting, thereby mirroring what is happening in the non-residential property sector.

For now, some life support for the ailing house market comes in the form of a seeming return to life of the mortgage market and a few other factors. After contracting for more than a year, the value of new mortgage loans granted for residential dwellings and flats has in recent months started to grow again. Says Rode: “The seeming recovery might be explained by low and steady interest rates, but also by the continued recent but unsustainable growth in disposable incomes.”

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SA Commercial Property Market  |  Erwin Rode
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