INVESTOR INTELLIGENCE
The second market of interest is that of estate living. As Rode points out, the prospect of growth in this sector exceeds that of freestanding homes, largely as result of growing concerns of safety. With this being said, Rode is quick to point out that the residential market is not at the bottom of its cycle yet. As a result, he predicts that the real-term value of properties will continue to decline, given the macro-economic forecast both within South Africa and across the globe.
Commercial
The commercial market is seeing some positive growth, according to Rode. The retail sector, however, is oversaturated at this stage. This is worsened by the fact that salaries aren’ t keeping up with inflation, leading to less actual wealth for consumers. As Rode points out, the lower tier of the retail market is more likely to be hit, given the fact that low-income consumers are more vulnerable to economic decline. Another factor that comes into play when evaluating the retail sector is the impact of technology.
While it is inevitable that online shopping will have an effect on brick and mortar shops, Rode is skeptical regarding its potential for disrupting the lower end of the market. As he points out, those who are able to spend more money on relative luxury goods would be more tempted by online shopping( and expensive courier costs) than those looking to buy the essentials. The extent of technology’ s impact in the retail sector of South Africa, however, remains to be seen.
Office cap rates
Rode’ s latest report reveals that capitalization rates are edging up persistently. Vacancy rates are stubbornly refusing to decline and nominal rentals showing growth below building cost inflation leads to a slowed rate for capital returns. Positively, however, the market is seeing a 10 % growth, indicating a more stable sector than residential. As Rode points out, it’ s important to once again take into account the macro-environment at present.
Recently, Rode noted that the salary growth( in terms of employees) in some of the country’ s largest municipalities grew by 11-12 % in a few years, compared to the inflation of 6 %. Not limited to the public sector, the over-spending on additional employees is one of the first things to be reined back in times of economic trouble. As a result, we see less demand for offices, as companies downscale or – in some cases – close their doors for good.
The industrial sector is, according to Rode, in much the same position as offices. This, too, is set to grow in coming years, accelerated by the fact that industrial rental rates are currently very low.
ERWIN RODE CEO, Rode & Associate
Subdued business sentiment keeps rentals at bay
The current weak and low levels of business sentiment are set to keep the demand for industrial space at bay, the result of which could be continued sub-inflation growth in market rentals for industrial space.
The first graph shows the robust inverse correlation between industrial property vacancies( national) and changes in business confidence- as measured by the RMB / BER Business Confidence Index. Naturally, business decision-makers can be expected to be hesitant to expand production capacity by renting more space when they are dissatisfied with prevailing business conditions. The implication is that the current low and waning business sentiment could result in more upward pressure on industrial vacancies over the next year or so.
The next graph shows the inverse relationship between the growth in market rentals of industrial property and vacancies. Note how in recent quarters vacancies have increased moderately and how this has had a cooling effect on the growth in rentals. In the first quarter of 2017, prime industrial rentals showed— on a national basis— yearly growth of roughly 5 %. This is slightly below the estimated growth in building costs of 6 %.
Big picture
The global economy is in a state of flux, leading to inevitable uncertainty for investors. Rode summarises South Africans’ mindsets by stating that we’ re a nation of consumers, rather than industrialists or investors. One can only hope that the current economic situation will spur on investments – both locally and offshore- leading to a more optimistic growth outlook.
44 SEPTEMBER 2017 SA Real Estate Investor Magazine