Measured on a sample of assets valued at just shy of R105bn, the half-year indicator represents over 50% of the annual IPD Index value which in turn is estimated at approximately 60-65% of the commercial investment property universe in SA.

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. On an annualised basis, the return to H1 2012 stands at 11.4% which is slightly stronger than the Index return to end 2011 (10.4%), making SA one of only a handful of markets that have shown some growth, albeit marginal. That being said, the return is still lower than that experienced in both Canada (14.9%) and the US (11.9%).

Comparing asset returns, we see from the graph below that direct property only beat inflation and cash, with a corresponding weakening yield. Once again this raises debate around the efficacy of listed property performance which only attaches a relatively small proportion of its performance to underlying property fundamentals, being rather heavily influenced by the stock-market generally and the direction of bond yields, more particularly. The risk for listed returns is if property fundamentals coincide with a period where listed property falls out of favour in preference for other equities, add rising long bond yields; under such a scenario the listed sector could take quite a knock as has occurred in the past.

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 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 to pay.

The graph below shows the trend over a 10-year period and how costs have been allocated between owners and tenants:

Sector-wise, 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 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, managing director 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 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,” adds Garrun “We are still not seeing any substantial recovery.”

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, it is the essential resource for local and international investors considering commercial property investment in SA.