No recovery for property yet

Stan Garrun

The Indicator is based on a sample of 1088 properties covering R104.7 billion capital value at the end of June 2012.

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.

A major obstacle for the industry identified in the results is skyrocketing operating costs, which are quickly outstripping income growth and pushing cost ratios to unattractive levels.

Electricity costs continue to rise and, at 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 burden of costs is being felt jointly between tenants and owners, however, with around three quarters of total costs falling to the tenant.

Office recovery negligible

The picture is worst in the office sector. 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. Nevertheless, there is room for cautious optimism.

Gains in retail, industry

Gains are evident in particularly the retail but also the industrial sectors.

"Retail property 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," explains Stan Garrun, MD of IPD SA.

Positive rental growth at 4.2% and declining vacancies from 4.3% to 4.1% are likewise good news for industrial property investments.

Six months ago, the Indicator'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," adds Garrun. "We are still not seeing any substantial recovery."

The SAPOA/IPD Property Index is a definitive standard for measuring property investment returns. The transparency it provides for commercial property has consistently added to the credibility of the asset class, it is an essential resource for local and international investors considering commercial property investment in South Africa.