SA's office market still strong

Posted On Wednesday, 13 March 2002 03:01 Published by
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Although rising vacancies were smothering rentals, analysis shows a still-healthy take-up of space is no cause for panic
Although rising vacancies were smothering rentals, analysis shows a still-healthy take-up of space is no cause for panic

KwaZulu-Natal Correspondent

DURBAN Contrary to popular belief, SA's office market is still fundamentally strong and does not warrant the current panic scenario, according to Rode's report on the SA property market for the final quarter of 2001.

Editor Dirk de Vynck says office demand or the total space occupied was the most crucial indicator in determining the health of the office market. Although rising vacancies were smothering office rentals, especially in the decentralised Johannesburg office nodes, analysis shows the still-healthy take-up of office space does not warrant alarm in the market.

In decentralised Johannesburg, the take-up has been almost 83000m² a quarter since the beginning of 1999. This rate translates into six quarters before the space currently vacant is occupied, provided no new office supply comes on stream.

However, De Vynck says the deterioration of central business districts has affected take-up significantly, with all major central business districts experiencing negative take-up.

He believes that as long as demand for space grows faster than the rate at which new office buildings are added, the vacancies 'are not too worrying'.

In decentralised Cape Town, demand and real rentals have experienced healthy growth. However, the increase in vacancies during the past three quarters may put a temporary damper on rental growth.

Statistics SA data show a decline in the number of new buildings completed last year, with oversupply in the Cape Town office market.

The Rode report shows that capitalisation rates for industrial lease-backs and decentralised offices, except in Durban, have worsened slightly during the past year.

De Vynck says given that capitalisation rates reflect perceptions, the continued rise in capitalisation rates reflects investors' worsening sentiment for such properties.

Capitalisation rates are the property equivalent of the forward earnings yields of shares, and reflect investor perceptions of growth prospects and risk.

De Vynck says the rise in property unit trust income yields coincides with a drastic fall in the rand and a shift by investors into randhedge shares. A depreciating rand and concomitant expectations of a rise in inflation are likely to knock listed property because of the close correlation between long-bond yields and listed property yields.

Consequently, listed properties are on average 15% undervalued relative to directly held property.

Residential house prices have continued to recover, with Cape Town prices growing the fastest in the past decade. National nominal house prices grew 8,7% in the year to June 2001, with Port Elizabeth leading the field at 14,5%.

The report highlights the tough times experienced by the building industry in the past 10 years, caused primarily by the jump in real interest rates.

Publisher: Business Day
Source: Business Day

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