Decreasing Appeal of Commercial Property

According to the SAPOA/IPD South Africa Biannual Property Indicator of South Africa, the commercial real estate in the country has shown a 4,6% total return for the six months to June in 2010. This report implies that the first half of this year has a positive income return condition even though the capital growth still remained flat.

The report also shows that the commercial real estate in SA is coming out from a cyclical funnel which started in the first half of 2009. However, it warns of that the signals given out are mixed because although the net income continues to grow, there is also an increase in vacancies while yields show a drop from 13 basis points to 8.5%.

According to John Cleland, head of research at IPD South Africa, the real agent for the good performance of investors in the first six months if mainly the income. “Investors are focusing on the preservation and growth of income in the face of muted capital growth,” he says.
He added that although there was a boost in tourism during the 2010 World Cup, still the net income growth remained very low.

“However, sharp increases in operating costs, which rose by 12,2% during the first six months of the year have dampened the recover process,” says Cleland.

With regards to the office rental market rate, Cleveland says that it experienced a growth of 1.3% in addition to a 6% income growth. The figures are encouraging since in 2009 it was on a -2.6% level only.

“High vacancies suggest there is an over-supply of available office space and it is only in the inner city that the office market has managed to reduce the rising level of vacancies. This resulted in strong average capital growth for offices in the inner city segment,” he says.

Cleland also said that in the industrial property market sphere, there is a continuous struggle. This is caused by the strong value of Rand these days and that there is a decrease of activities surrounding business actors. Furthermore, confidence among them is also declining.

On the positive side however, Cleland proclaims that the movement in smaller shopping centers between 50 000 m2 and 100 000 m2 is a very positive one especially during the first six months this year. This improvement shows that there is an increase in the confidence of retail shopping centers.