A bleak picture has emerged of the state of two of the major segments of the commercial property markets in the latest Rode Report. The report on the state of the property market said weak office demand continued to hamper rentals, while the poorly performing manufacturing sector posed the biggest threat to industrial rentals.
However, the report said large shopping centres still managed to put in an impressive capital return performance despite the poor growth in real retail sales volumes during last year.
It added that relative to other centre types, and to a lesser extent non-residential property types, larger malls had in recent years shown the strongest growth in base rentals, maintained the lowest operating cost to gross receivable rental ratios and had the lowest vacancy rates.
“Perhaps this also explains why investors rated larger centres more favourably in 2012,” it said.
However, the report said the demand for office space was “flat lining” and it was as if the life was being sucked out of this market by cooling economic activity and worsening unemployment.
It said there was a strong correlation between real economic growth and the growth in demand for office space, stressing that in the first quarter of this year the annual growth in real gross domestic product (GDP) cooled to 1.9 percent from 2.5 percent in the previous quarter.
The report added that the slowdown in the yearly growth of economic activity, which has been discernable since about the second half of 2011, had also meant weaker growth in employment. Unemployment had worsened to 25.2 percent in the first quarter of this year from 24.9 percent in the fourth quarter.
Statistics SA’s latest quarterly labour force survey, released after the Rode Report’s publication, revealed that the unemployment rate had improved marginally to 25.6 percent in the second quarter. But the number of jobless people increased by 254 000 to a record high of 4.7 million.
The Rode Report said the importance of conditions in the labour market to office property was the robust correlation between growth in total employment and in office demand. It added that both total employment and office demand showed no growth in the first quarter of this year compared with the corresponding quarter a year ago.
The report said office vacancy rates in decentralised areas had also remained in general at about the previous quarter levels in Johannesburg, Pretoria, Durban and Cape Town.
It said office market rentals continued to show mediocre growth on the back of weak demand for office space, and no improvement in vacancy rates.
Market rentals in the first quarter of this year had grown by 5 percent in Cape Town decentralised and, in Johannesburg and Pretoria decentralised, they had recorded growth of 4 percent, while in Durban decentralised rentals were up by a measly 2 percent.
The report said the recent slump in economic activity had prompted a number of economists to scale down their real GDP growth forecasts for this year, adding that this did not augur well for office demand, vacancy rates and consequently market rentals.
However, the SA Property Owners Association (Sapoa)/Investment Property Databank office vacancy survey report for the second quarter revealed that vacancies in South Africa’s stock of premier grade office space remained exceptionally low, despite high levels of speculative development activity.
It said premier space continued to enjoy the lowest vacancies, underscoring high demand from tenants, at just 2.2 percent vacancy rate overall. The report added that, given high levels of speculative office development, this performance was particularly noteworthy. A-grade space maintained an 8.7 percent vacancy rate overall, it said.
It said both sectors were still well in line with the natural or frictional vacancy rate of between 5 percent and 10 percent.
The Sapoa office vacancy survey is the largest survey of its kind in South Africa and provides a quarterly insight into 15.9 million square metres of office space, in 51 distinct office nodes throughout the country. The national office vacancy rate across all grades of property was at 11 percent in the second quarter, a small increase compared with last year.
However, the Sapoa survey report said the high level of speculative development was pushing up vacancy rates across all grades in the market and current estimates suggested speculative space remained about 50 percent unlet. But, it said expectations were that speculative development levels would begin to soften, which should ease the impact on office vacancies.
Turning to the industrial property market, the Rode Report said the poorly performing manufacturing sector posed the biggest threat to strong growth in industrial rentals.
It added that the output produced by the manufacturing sector in the first quarter of this year showed no year-on-year growth. Compared with the previous quarter, the performance of this sector was worse, with output contracting by an annualised rate of almost 8 percent.
Nominal industrial rentals in Port Elizabeth showed annual growth of 9 percent. The central Witwatersrand followed with growth of 6 percent, while rentals rose by only 4 percent on the East Rand and Cape Peninsula.