Filomena Scalise

Growth in South African commercial property returns stagnated in the first half of 2011, reflecting an overall slowdown and uncertainty in local and global economic conditions.

Property delivered a 4.3% total return in the six months to June according to the SAPOA/IPD SA Biannual Property Indicator, released on Tuesday.

IPD is a global information business, dedicated to the objective measurement of commercial real estate performance.

Rental income provided the only return to investors at 4.3%, while at an aggregate level the market recorded zero capital appreciation. The disappearance of any capital growth takes the market back to the similarly flat conditions of the same time last year, after a small spurt of growth in the latter half of 2010.

Although returns deteriorated across the board, some sectors of the market still provided glimmers of growth.

Retail property remained resilient, managing to produce 0.4% capital growth in the six months. Offices posted just 0.1% capital growth with the overall sector returns adversely impacted mainly by the performance of inner city offices.

The industrial sector, however, with the exception of high-tech industrial property, suffered a contraction in capital growth of -1.5%, making it the worst performing of the three main sectors.

The indicator suggested that downward pressure on property returns was coming from a number of directions. Vacancies passed yet another turning point and started rising again in the first half of the year. The aggregate national vacancy level stood at 6.8% as at the end of June, with office vacancies of 11.7% being of particular concern for landlords. Retail vacancies were currently 6.4% while industrial vacancies were 4.2%.

These rising vacancies contributed to slower growth in rental income received by property owners, with the retail sector subjected to the earliest declines. In addition, base rental yields moved out to 9.6% as at June, a softening of over 40 basis points compared to December 2010. These factors combined to wipe out growth in property values.

In much the same way that property growth in the second half of 2010 was not just due to post World Cup exuberance, the flat-lining of SA property growth in the first half of this year comes within a more subdued economic context.

The small upturn in 2010 was supported by a number of economic factors including a return to retail sales growth, improved manufacturing output and a small rise in business confidence. There now appears to be a general loss of momentum and there are even contractions in some sectors.

Property returns are being increasingly influenced by localised conditions, resulting in greater divergence in performance between different provinces. Of the three main provinces, Gauteng produced the highest office returns, the strongest retail returns were in the Western Cape, and Kwazulu-Natal had the best performing industrial market.

Stan Garrun, Managing Director of IPD South Africa, commented: “Words like 'turmoil', 'volatility' and 'slowdown' are again appearing in global property headlines. Is this the onset of the dreaded 'double-dip'? The latest South African results from IPD show that we are not immune to global uncertainty. In South Africa we have also had to deal with difficult local issues most notably rising costs. The protection of income streams is therefore at the forefront of owners? minds. These trends indicate that there will be little defined growth in property values until the imbalance between supply and demand is righted and in the near term market performance is likely to be hesitant at best”. - I-Net Bridge