Property returns unexciting - hold steady for now

A report by the South African Property Owners Association and the IPD South Africa biannual property indicator to June 2012, has shown subdued property returns for the year to date.

IDP research director, Jess Cleland, says until economic growth picks up, the situation is unlikely to change. “For us to see a pickup in property returns we’re going to have wait and see a pickup in GDP growth, because without that there’s no demand coming through so vacancies remain quite high. It’s very difficult for property owners to try and drive rental growth when there’s all this excess in the market.”

Cleland says this is particularly true in office rentals, although there was some improvement in industrial and retail in the first six months of 2012.

She adds income returns from property remain high, at between 8 % and 9% depending on the type of property, making it worthwhile holding onto what you have.

IPD South Africa managing director, Stan Garrun, says until we see some economic growth coming through, the future remains bleak. “Demand is low. People are sitting tight, they’re negotiating with their landlords who are taking strain with high operating costs.”

Garrun says research has shown that landlords are passing a lot of these costs onto the consumer, including exorbitant electricity tariffs. “Electricity costs continue to rise, and at a monthly average of R12.8m², now make up one third of the total operating cost bill for property owners.”

With regards to the various sectors, office rentals are faring the worst: “Plagued by stubborn vacancy rates, which shifted from 12.1% in December 2011 to 15% in June 2012, and negligible growth at just 0.1%, office properties have also seen the highest growth in operating costs across all property sectors.”

All, however, is not doom and gloom: “Look for opportunities. I think investors are finding those. Prime properties that are well positioned are in fact well tenanted and the rentals are being realised and the vacancies are low.”
Garrun added: “There’s a tale of two markets. There are good properties that are performing well and then there’s lower grade properties that are not performing well.”

He says prospective investors would do well to eye properties that are well located. Some people, he added, are going offshore while others are seeking opportunities in the townships in attempts to keep the investment return up.”

Garrun says overall in the formal market things are currently moving sideways with no sign of a full-blown recovery across the sector.

In a report released on Tuesday, the IPD said property investment overall had delivered a total return of 5.9%, which comprised 1.5% capital growth and 4.4% income return for the first six months of the year.

The report said gains were evident in the retail and the industrial sectors: “Retail property returned the top capital growth rates at 1.7%, along with solid 3.7% rental growth and strengthening occupancy rates.”

In terms of the industrial sector, the report stated that positive rental growth at 4.2% and declining vacancies from 4.3% to 4.1% are likewise good news for industrial property investments.”


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