Strong economic growth, rising building costs and low vacancy
rates ensured that the industrial property market kept up its grand
performance during the last quarter of 2006.
This is according to the latest issue of Rode’s ‘Report on the SA Property Market’, published by Rode & Associates property economists, consultants and valuers.
The report shows that nominal rentals in all the major industrial conurbations recorded double-digit growth during the fourth quarter of 2006.
In fact, rental growth was higher than building-cost inflation over the same period.
The report also shows that during the last quarter of 2006, investors required a minimum total return – income return plus capital growth – of roughly 15% to 16% to prompt them to buy a non- residential property.
Given that the capitalisation rate for prime decentralised office property, for example, is currently standing at about 9% to 10%, this hurdle rate implies that investors expect capital appreciation of about 6% a year over the next five years.
“This is a very modest expectation”, says Rode & Associates CEO Erwin Rode.
According to the report, listed property rebounded from the
beating it took during the middle of last year, with income yields
of property unit trusts currently trading as low as 6%.
The Rode team sees the fact that yields are at a notable discount to long-bond yields as indicative of the market buying into the idea that fundamentals are strong, and solid income growth is on the horizon – sentiments recently substantiated by funds such as ApexiHi, Resilient, Hyprop and Growthpoint, reporting distribution growth of 15% to 20%.
On the whole, nominal grade-A central business district (CBD) and decentralised office rentals sustained their positive trend during the final quarter of 2006, in aggregate growing by 13% and 12%, respectively.
A notable exception was the Cape Town CBD, which showed no growth.
During the last two years, flat rentals grew by 5,5% to 7,5% a year in all of the major metros, except Durban, where growth averaged below 3% a year – this is notable seeing that consumer prices grew by roughly 4% a year over the same period.
The Rode report also found that building-input-cost inflation (as measured by the Haylett index) was as high as 11% during the last quarter of 2006.
According to Medium-Term Forecasting Associates, this was the result of not only a buoyant building industry, but also higher oil prices, a weaker rand exchange rate, and higher materials prices.
The BER Building Cost Index, which includes building input costs as well as contractors’ profit margins, grew by 7% during the reporting quarter.
The fact that the latter index grew faster than the Haylett index suggests that building contractors, owing to a reduction in tendering competition, have reduced their profit margins during the last quarter of 2006.