No improvement in demand for office space

No sudden improvement in the demand for office space could be expected in the near future‚ as key demand drivers were “losing their vigour”‚ according to property economist Erwin Rode.

In the latest issue of Rode’s Report on the South African Property Market‚ Rode said that what was discouraging for the outlooks for office demand and vacancy rates was the deceleration in output in the services sector in the first quarter of the year.

Rode‚ of Rode & Associates‚ publisher of the report‚ said: ”Waning growth of output in the services sector does not bode well for its employment prospects‚ which in turn implies continued weak demand for office space.

“Slumping business confidence is another bad omen for office demand - this as businesses are unlikely to expand premises or hire new employees while confidence levels are low.”

The result‚ “unsurprisingly”‚ was that in the first quarter of 2012‚ office vacancy rates remained stagnant‚ leading to unimpressive rental performances.

In the reporting quarter‚ the only rentals that could muster any growth at all were those in Pretoria decentralised (0.5%)‚ according to the report.

Market rentals in Johannesburg decentralised remained at the same level they were at a year ago‚ while those in Cape Town (down 1%) and Durban decentralised (down 2%) contracted slightly.

Weaknesses in the manufacturing and retail sectors‚ “the two support pillars of the industrial property market”‚ were likely to continue to place a lid on demand and‚ consequently‚ on rental growth.

In the first quarter of 2012‚ only the Central Witwatersrand (at a growth of +10%) was able to buck the trend of poor yearly growth in rentals. In other major industrial conurbations‚ such as the East Rand (+3%)‚ Durban (+0.5%)‚ the Cape Peninsula (-1%) and Port Elizabeth (-2%)‚ rentals either showed poor growth or contracted compared with a year ago.

On the residential front‚ the report revealed that nationally‚ rentals on flats and houses grew by 5% and 4% respectively‚ while those on townhouses lagged behind‚ at only 1% growth.

Meanwhile‚ house prices showed mild yearly contractions for the first six months of the year - the largest contraction recorded since the 1980s‚ according to Rode.

“House prices last significantly deflated during the first half of 2009‚ after which they rebounded‚” he said.

But while it had been a “bumpy ride” for capitalisation rates over the past three years‚ the investment mood among direct unlisted investors “remained fairly buoyant”.

Rode said that even amid the uncertain economic times‚ “property investors refused to panic and this was in part due to the fact that‚ despite an upward trend since 2008‚ nonresidential vacancy rates are still below their early 21st-century highs”.

A property’s vacancy rate has a direct impact on the perceived risk to its potential income. This will in turn affect the required income return‚ or capitalisation rate‚ at which investors will be willing to trade property.

(I-Net Bridge)

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