Struggling South African Property Market Sees Some Hope in Retail and Industrial Sectors
Only retail and industrial are showing a glimmer of hope in South Africa's struggling property market. The office sector is hurting the most.
That is the most recent analysis published in the South African Biannual Property Indicator, a research tool of the South African Property Owners Association and the Investment Property Databank (SAPOA/IPD)
Stan Garrun, managing director of IPD SA, reports retail property in the first half of this year returned the top capital growth rates at 1.7%, along with solid 3.7% rental growth and strengthening occupancy rates. Vacancies in the sector improved from 6.0% to 5.7% over the first half of the year.
Positive rental growth at 4.2% and declining vacancies from 4.3% to 4.1% are "likewise good news for industrial property investments," he said.
Six months ago, the IPD's 2011 results showed 10.4% annual returns in property investments overall, with a slight uptick in the second half of the year that suggested a possible recovery. At the same time, vacancies increased to 6.9%, rental growth declined to 6.2% and yields weakened by 36 basis points, to 9.6%.
"Although returns for the first half of 2012 are better than 2011, the results show a fairly muted picture of performance," concedes Garrun "We are still not seeing any substantial recovery."
Property investment overall delivered a total return of 5.9%, which was comprised of 1.5% capital growth and a 4.4% income return for the first six months of the year.
South Africa Commercial Property News reports a major obstacle for the industry identified in the results is "sky-rocketing operating costs, which are quickly outstripping income growth and pushing cost ratios to unattractive levels."
Electricity costs continue to rise, and at a monthly average of R12.8/m2 now make up one third of the total operating cost bill for property owners. Rates and taxes constitute a further 20% of the total.
The SAPOA/IPD Index notes the burden of costs is being felt jointly between tenants and owners, with about three quarters of total costs falling to the tenant to pay.
The office sector is faring the worst. Plagued by stubborn vacancy rates, which shifted from 12.1% in December 2011 to 15.0% in June 2012, and negligible rental growth at just 0.1%, office properties have also seen the highest growth in operating costs across all property sectors.
Offices in inner city and provincial nodes are the hardest hit, with rental levels moving backwards.
According to South Africa Commercial Property News, the SAPOA/IPD Property Index is the definitive standard for measuring property investment returns.
"The transparency it provides for commercial property has consistently added to the credibility of the asset class," the publication states. "It is the essential resource for local and international investors considering commercial property investment in South Africa."