Rode & Associates says Capitalization rates are now firmly on a rising path

Posted On Friday, 22 September 2017 13:54 Published by
Rate this item
(0 votes)

Property, whether directly held or listed, was the darling of South African investors over the past decade and longer.

Johan_Hattingh

There were multiple drivers of the extended boom.

Firstly there was the drop in required income yields (also known as capitalization rates) in the wake of the sharp decline in the inflation rate since 2000, which allowed interest rates to decline, too. Capitalization rates decline when the market expects that income streams will accelerate, or when risks are perceived to diminish, or when the yields of substitute investments such as long bonds decline. In this way, capital values are boosted. The high returns were thus a windfall, over which investment managers had no control, but one wonders how many managers’ bonuses were, and still are, based on such windfall profits.

Secondly, the commodity boom was a bonanza which generally boosted economic growth and thereby filled up the coffers of the state, which allowed generous, unsustainable salary increases to be dished out all round, not to mention an unsustainable splurge on social expenditure by the government. But, like all booms before it, this boom is over. In fact, the fiscus is now (hopefully) quite panicky, because it has run out of options to raise revenue painlessly. The International Monetary Fund (IMF) could – like a deus ex machina – come to the aid of the fiscus, but it would be conditional on the government getting its house in order, and such a scenario wouldn’t be painless, either – not to mention the bruised ego.

Thirdly, during the latter stages of the commodity boom, and especially thereafter, consumers increasingly lived high off the hog, thereby unsustainably benefiting retail sales and, consequently, shopping centres’ revenues. This debt-fuelled retail splurge is now also coming to an end.

Rode and Associates has been tracking capitalization rates of directly-held properties for nearly three decades. The chart portrays the sharp decline in capitalization rates from 2003 onwards, and the short temporary uptick during the crash of 2008. From 2009 we saw a gradual decline in required yields (thereby boosting prices), but it is also clear that capitalization rates are now firmly on a rising path. The fun is over.

Last modified on Friday, 22 September 2017 19:39

Most Popular

Africrest Roars Proud With Its Latest Office To Residential Conversation- ‘The Leo’

Apr 29, 2019
 THE LEO
This month, Africrest Properties opened their latest residential conversion project up…

John Rabie launches European development company with R1,4b project in Lisbon

Apr 29, 2019
 JOHN RABIE
John Rabie, one of South Africa’s most successful property developers, has recently…

Appeal court ruling against high interest rates charged by bodies corporate

Apr 23, 2019
MICHEAL BAUER
The recent ruling by the Supreme Court of Appeal where the body corporate of Gardens…

Request for Proposals for the Lease and Development of Properties

Apr 29, 2019
PRASA hereby invites proposals from potential tenants to lease and develop/upgrade…

If a bond approval is included as a suspensive condition in an offer to purchase, does this conclude the terms ans conditions thereof?

Apr 23, 2019
MICHEAL BAUER
In most cases when a person purchases a property, he will have to apply for a mortgage…

Please publish modules in offcanvas position.