South African property shows modest improvement in H1 2014

The IPD South Africa Biannual Property Indicator, released today, showed that the South African property sector delivered an improved 7.4% total return for the first six months in 2014. This is 90 basis points more than the December 2013 biannual total return of 6.5%.

The uptick in performance growth can be attributed to an improved capital growth of 3.1% compared to the 2.2% recorded for the last 6 months of 2013. The growth in capital growth was underpinned by an improving base rental growth and a firming in the rental yield. Income return has remained stable at 4.2%.

The property sector outperformed both bonds (JP Morgan 7-10 Year South Africa Government Bond Index) and consumer price inflation, which recorded growth of 2.0% and 4.3% respectively.

A continued focus on operating costs has started to bear fruit for landlords as costs only increased by an annualised 3.2% for the six months ending June 2014. Operating costs as percentage of gross rent decreased to 44.6% from 46.9% as at December 2013.

On a sector level, industrial property outperformed during the period – posting an impressive 10.0% total return for the six months comprising 5.1% income return and 4.7% capital growth. This performance was underpinned by a low vacancy rate of 2.7% – indicative of the scarcity of supply currently prevalent. The low vacancy rate was not segment specific with all types of industrial property currently at 3.0% or less. Industrial vacancy rates in Gauteng, the Western Cape and KwaZulu-Natal are currently below their long term averages.

The retail sector followed with 7.4% overall return of which 3.4% was capital growth and 4.0% income return. Despite underperforming the industrial sector during the six months under review, the retail sector recorded a total return 110bps above the 6.3% recorded for the last six months of 2013.

Super regional and Neighbourhood shopping centres registered the lowest capital value growth in the sector at 2.1% – perhaps surprising given the different characteristics of these two retail property types. However, in terms of base rental growth, Super Regional centres continued to deliver a robust growth of 8%.

Regional shopping centres registered a healthy base rental growth of 4.6% over the six months though this does not yet reflect in strengthening capital value growth or returns. This is perhaps an early indication of valuers’ starting to factor the impending rising interest rate cycle into their valuations.

The office sector continues to lag behind and recorded a total return of 5.6% for the six month period. The sector continued to register double digit vacancy levels which are putting pressure on rental levels. Offices in city decentralised nodes were the worst hit in terms of capital growth, registering 1.1% capital growth and a total return of 5.5%.

Ken Reynolds, Regional Executive, Gauteng at Nedbank Corporate Property Finance, index sponsors, said: “In terms of base rental growth and occupancy levels, South Africa’s smaller cities and central business districts are feeling the pinch more than offices in urban decentralised office nodes, which highlights the importance of nodal selection in the current phase of the property cycle.”

Stan Garrun, Executive Director & Head of South Africa at MSCI where IPD forms the core of the real estate offering, commented, “This is perhaps more of the same but the modest overall improvement over the first 6 months of 2014 is heartening. Very encouraging is that barring offices, the improvement was widespread over most property fundamentals. Retails dominated, but the industrial market showed the strongest improvement in key aspects. Offices continue to bear the brunt of it, exacerbated by new development activity. There are good signs but also conflicting ones; exposure to the office sector is a serious drag on investor returns. The market will want to mop up the oversupply in relevant segments and we look entreatingly for the slightest economic tailwind.

The IPD South Africa Biannual Property Indicator is the definitive standard for measuring property investment returns. The transparency it brings to investment property adds to the credibility of the asset class. It is the essential resource for local and international investors considering commercial property investment in SA.