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PROPERTY: South African Property Growth Delicately Balanced, Says IPD


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The South African commercial real estate market managed a gentle but respectable 4.6% total return for the six months to June 2010, according to the SAPOA / IPD South Africa Biannual Property Indicator.

In the first half of this year, it has once again been robust income returns, at 4.4%, which have driven the bulk of returns. Capital growth, however, has plateaued after a second-successive biannual 20 basis points positive return. The marginal growth is an improvement on the same period last year, which, at -0.7%, was South Africa’s only recorded period of capital depreciation since the credit crunch struck in mid 2007.

The results suggest a slow but steady return to trend after the cyclical trough in the first half of 2009, and puts the market on track to post an improved return for the full year 2010 compared to the 8.7% total return recorded in 2009.

But the signals are mixed. On the one hand, net income grew in both nominal and real terms, stimulated by an overall decrease in vacancies from 7.1% to 6.9%. This positive impact, however, was offset by a further softening of yields by 13 basis points to 8.5% suggesting that investors remain cautious about risk even in the face of a recovering economy.

Jess Cleland, Head of Research at IPD South Africa, said: “The real driver of performance for investors over the first half of this year – and indeed the last two years – has been income. Investors’ focus, quite rightly, is on the preservation and growth of that income stream in the face of muted capital growth.”
Sector performance

The retail sector, buoyed by a boost in tourism during the 2010 FIFA World Cup towards the end of the six-month period, improved on its -0.4% capital depreciation over the second half of last year to deliver flat capital growth.

Tourism inflows did help to drive sales growth over the second quarter, particularly in larger, high profile shopping centres. Vacancies declined slightly over the six months to 4.9% and net income growth is relatively low but accelerating. However, sharp increases in operating costs – which inflated by 12.2% during the first six months of the year – threaten to dampen the recovery process.

Offices have continued their recovery with the strongest sector capital growth, at 1.3%, posted on the back of 6.0% net income growth and marking a turnaround in fortunes since its -2.6% decline in H1 2009. However, high vacancies suggest a level of oversupply within the market indicating rentals will remain under pressure until space absorption returns to the sector. Inner city offices were the only segment of the office market that managed to attenuate rising vacancies, resulting in stronger than average capital growth.

The industrial property market continues to struggle against the twin pressures of a strong Rand together with declining in business activity and confidence, as evidenced by a sharply declining Kagiso PMI from early 2010 onwards.

Capital growth in the sector suffered as a consequence over the first half of the year, leading to a negative capital return of -1.1%. One bright signal for industrials, though, was how vacancies decreased slightly to 5.7% compared to 6.0% at the end of December 2009. Net income growth outstripped operating cost growth, resulting in an increased operating profit for owners of industrial property.

Investment trends for the contributing funds to the IPD database – predominantly large listed and life and pension funds – reveal a confidence in the prospects for the retail sector, particularly for shopping centres between 50,000m2 to 100,000m2 in size. Conversely, there has been an overall disinvestment in the office sector with a large portion of inner city offices being offloaded from investment portfolios.

The performance of listed property over the first six months of 2010 also augurs well, indicating confidence in the sector. The solid returns generated by direct property have supported the excellent performance of listed property over the first six months of 2010. Underlying direct property assets provide stable and predictable income streams, driving listed property returns higher within an overall weak equities market. South African listed property PUT and PLS indices returned 9.9% and 10.7% respectively, easily outperforming the JSE All Share index return of -4.1%.

Stan Garrun, Managing Director at IPD South Africa, added: “By the midway point of the first year of the new decade, a familiar real estate pattern is emerging internationally: divergence from uniformity. Two years ago, markets all traveled in one direction – downward – while last year, there were isolated signs of recovery in some markets. In 2010, the divergence in market trends is even more apparent.

“In the UK, the recovery from steep capital depreciation is still underway, although at modest levels, while the United States just emerged from two and a half years of

write-downs in Q2 and France similarly has just returned to growth after two years. By comparison, capital growth is still negative in Canada, the Netherlands and Australia. In Ireland, capital depreciation has accelerated once again after markets came under renewed rental pressure.”

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