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PROPERTY: Recovery In Office Market

 



Recent Western Cape Business News

There are early indications that the grade-A office market might be staging a recovery. The rally is being led by bellwether Sandton CBD, which showed phenomenal rental growth of 16% in the fourth quarter of 2011, according to the latest Rode Report.

Digging behind the scenes of Sandton’s rental performance, reveals declining vacancy rates on the back of improving demand for A-grade office space. In other top office nodes, however, the rental performance was not as impressive. Here vacancy rates are finding it hard to decline, and nominal rental-growth below building-cost inflation (+14%) was the general observation.

For the time being, no improvement in the demand for industrial space is discernible. This explains the pedestrian performance of industrial rentals. In the reporting quarter, Pretoria (+8%) showed the best yearly growth. The picture was, however, more dreary in the other conurbations, with nominal-rental growth ranging between 2% and 3% for the Central Witwatersrand, the Cape Peninsula and Durban. In the windy city of Port Elizabeth nominal rentals were 1% lower when compared to a year earlier. 

At the same time, signs of a possible improvement in investment demand for industrial and office properties became visible in the fourth quarter of 2011. This as capitalization rates on these property types strengthened (decreased) marginally. But, cautions property economist, Erwin Rode: “One should not read too much into this, considering that office and industrial vacancy rates are still stubbornly refusing to drop, while rentals are finding it difficult to beat inflation. This, naturally, does not augur well for capital-growth prospects.”

On the residential-rental front, while townhouses showed no growth compared to a year ago, rentals on flats and houses were able to show a 4% growth. Says Rode: “As if dealing with mediocre growth in rentals was not enough, landlords who do not meter electricity separately will soon face another severe hike in operating costs in the form of seriously higher power costs – this on top of ever-rising assessment rates.” On the positive side, however, landlords who still have to service mortgage debt can for now breathe a sigh of relief in light of the Reserve Bank’s decision to keep interest rates steady for the time being.

The housing market continues to be stuck in a rut, this in spite of a year of record low interest rates. Says Rode: “It seems that neither households nor mortgage providers are taking the bait of low borrowing costs, ” says Rode.

Banks themselves seem to be constrained by the still frustratingly high ratios of debt to disposable income. A further factor that has entered the equation quite recently is the explosive growth in unsecured loans. These factors form an important brake on granting mortgage bonds – and one can add to this concoction the expected sharp increase in utility charges, expected more modest salary in-creases this year, and the fact that house prices are still very high in real terms.


 
 
 
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