Although commercial property have weathered the recessionary storm quite well, it has had mixed fortunes over the last year.
The South African Property Owners Association’s (SAPOA) South African Property Market Trends Report 2010 showed South African commercial property returns have declined for the second consecutive year, but that it produced a marginally positive capital growth in a market with weakened fundamentals.
But compared to other markets, SA may emerge from the global downturn slightly battered but fairly unscathed due to a nascent turnaround in economic conditions and business confidence.
“South African property returns have weathered the global downturn remarkably well,” the report says.
Notwithstanding the second consecutive year of declines in returns, property performance remains strongly in the black with a nominal 8,7% total return for the year to December 2009.
While not immune to the impact of the global financial markets and recession, the negative effect on capital growth was offset by constant income growth. The net result was a marginally positive 0,3% capital growth, which was underpinned by a steady, strong income return of 8,4%.
Be that as it may, SA returns still read well in a global context. It succeeded in again producing the highest nominal returns of all countries measured by Investment Property Databank (IPD).
One of only a few countries to produce a positive total return, SA is the only country where capital growth did not decline at an all property level. SA property has therefore not been re-priced to the extent that it has in other mature markets.
The report also showed that apart from the unique positive capital growth in 2009, it is the income return of the South African property market that proved to be the differentiator between it and other markets, with an average spread of almost 200 basis points compared to most other countries.
The spread in returns between the retail, office and industrial sectors is extremely tight, but there are different conditions in the underlying fundamentals driving these returns. Total return ranged from 8% for offices, to 8,7% for industrials and 8,8% for retails.
As far as yields are concerned, the industrial sector appears to be lagging slightly, but is quickly catching up.
After four consecutive years of considerable yield suppression, 2008 saw the first upward movement in yields in the retail and office sectors, by 40 basis points and 15 basis points respectively.
The industrial sector continued to experience strong yields into 2008, but in 2009 saw the biggest yield movement of the three sectors with a 91-point softening. This change re-establishes the positive spread of industrial yields over office yields, a position that was briefly reversed in 2008.
Vacancy levels in all sectors have risen significantly over the past year. The rates of growth are akin to those experienced in the late 1990s for each respective sector, with the retail sector being less volatile and showing more gradual growth.
Vacancies now stand at 4,8% for retail, 10,6% for offices and 6,7% for industrial.