South Africa’s commercial real estate market maintained modest growth over 2011, producing a 10.4% total return according to the SAPOA / IPD South Africa Property Index. This subdued result marks a softening in the market from the mini-recovery in 2010 – which delivered a 13.4% return – however is still an improvement over 2009.

Uncertainty in global markets, weak local demand and slowing consumer confidence resulted in muted capital growth of just 1.4%, while income returns were steady at 8.9%. Results improved marginally in the latter half of 2011, however this followed,  completely flat growth in the first six months of the year.  

Despite this minor improvement towards the end of the year concerns remain, particularly over the health of secondary (non-prime) markets. Even at a national level, fundamentals are placing downward pressure on rentals and bottom line returns. At an All Property level, vacancies rose from 6.6% to 6.9%, rental growth reduced to 6.2% and at the same time rental yields softened by 36 basis points to 9.6%.

Perhaps one of the most important themes coming out of the results is around a sharp convergence in growth across the main market sectors; this highlights the increasingly important impact of macro forces and high uncertainty on the property market (indeed the correlation between GDP growth and direct property returns is in the order of 75% as mentioned by a panellist attending the launch of the results in Johannesburg today). As such, quality and location are playing a greater role in differentiating property returns.

Retail property once again proved its resilient nature with the strongest capital growth of the three main sectors for the third consecutive year. Its 10.1% total return was comprised of 8.3% income return and 1.6% capital growth, boosted by relatively strong retail sales as consumers continued to spend. Overall, however, the growth in trading density fell below inflation and the outlook is for a continued moderation in consumer spending. An increase in vacancies to 6.0% also put pressure on rental values, resulting in a corresponding weakening of rental growth.

As a whole, the office sector managed just 1.3% capital growth over the year, which combined with a 9.7% income return produced an 11.2% total return. This figure, however, masks a wide range of results within the office sector, with quality and location generally underlying the ultimate differences. Better quality offices were able to drive higher rental growth from vacancies lower than the national average of 12.1%.

Industrial property managed the highest total return of the three sectors with 11.9%, although the income return of 10.4% is much more significant than the 1.4% capital growth. Industrial vacancies continued on their downward trend, and at the end of 2011 were the lowest of any sector at just 4.3%.

The South African (SA) results reflect a growing loss of momentum in global property markets in the wake of dampened sentiment particularly across Europe, where many markets saw a reduction in returns in 2011 compared to 2010. Outside of Europe, however, returns managed to improve slightly in Canada, Australia and USA.

Stan Garrun, Managing Director of IPD South Africa, commented: “The results confirm the impact of global economic instability and subdued conditions locally, on SA real estate investment performance. On top of this, high operating costs and a serious mismatch between demand and supply, are taking their toll on returns. While these figures do not necessarily point to further recessionary conditions, they do indicate that it is a long haul back to pre 2008 levels. The good news is that prime assets are performing well in all sectors. Any economic uplift should quickly release major new income growth for both tenants and landlords, as well as a pent up property development pipeline.”

Asset return comparison: Despite the moderation in direct property returns in 2011, it nevertheless outperformed most other major asset classes. While PUT listed property funds returned 12.2%, compared to 10.4% for direct property, PLS listed property funds only managed 7.7%. Equity markets and bonds returned 2.6% and 10.1% respectively.

Garrun continued: ‘‘2012 is the 15th year in which IPD have released a property investment index in South Africa. The index has grown exponentially in this time, co-incident with a burgeoning property market and development of a sophisticated mix of investment vehicles, including a large and highly competitive listed property sector.