Real Estate Investor Magazine South Africa Real Estate Investor Magazine - September 2017 | Page 45

INVESTOR INTELLIGENCE
CAPITALISATION RATES
(CAP RATES)
Capitalization rate is the rate of return
on a real estate investment property
based on the income that the property is
expected to generate. The capitalization
rate is used to estimate the investor's
potential return on their investment.
Capitalization Rate = Net Operating
Income / Current Market Value. This ig-
nores VAT, transfer duty and income tax
and assumes a cash transaction.
only result of the poor performing economy: mismanagement
by politicians, a lack in growth in the job market, widespread
corruption, and a global economic slump have all contributed
to what can only be described as a bleak economic outlook.
As Rode points out, globalization and the shifting of the
job market has lead to uncertain economic times (as seen with
Donald Trump’s presidency and Brexit, to name but a few.)
This political uncertainty is something we see in South Africa.
A lack of confidence in the South African market is hardly
surprising, given the largely anti-investment policies of the
government. As Rode points out, South Africa saw unrealistic
and unsustainable growth post-1994, leading to a super cycle
of commodity prices.
In recent years, far-reaching corruption and mismanage-
ment have meant that investors are pessimistic regarding
growth prospects. This, in turn, leads to a decrease in invest-
ments, as more and more South Africans are seeking financial
security in more stable markets.
Residential - House prices and rentals
need positive trends, upbeat sentiment and real-time confir-
mation to buy, sell and rent property.
The report includes an overview of the state of the South
African residential and commercial property markets, listed
property yields, capitalization rates, office rentals demand and
vacancies, industrial rentals, vacancies and retail yield. The lat-
est report reveals some interesting statistics and we share some
of the highlights.
State of South African property market
The latest Rode’s Report reveals some interesting findings
Economy
The South African economy is currently growing at 0,7%
Gross Domestic Product (GDP) which does not give an in-
vestor confidence to be able to invest. Junk status is not the
Rode says that South Africa is experiencing a decline in house
prices. The exception to this is the Western Cape, having seen
a growth in prices due to semigration to the Western Cape by
Gautengers. As Rode points out, however, the sustainability of
this could be lower than expected, given the national down-
ward trend in home values.
There are two key markets within the residential sector that
Rode feels warily optimistic about. The first is the affordable
housing market. Semigration trends have lead to house pric-
es in especially Cape Town, skyrocketing in recent years. In
addition to this, job security has seen a decline, with many
companies and sectors seeking to have less manpower (due to
ever-increasing expenses, including wages.) As a result, the list
of South Africans in need of affordable housing has increased,
offering a clear opportunity for investors – if they’re willing to
weather the storm.
SA Real Estate Investor Magazine SEPTEMBER 2017
43