News from the latest Rode's Report is there’s still no magic on the flat rental front, with rental growth generally fizzling out across all of the major metropolises.

In the first quarter of 2009, rental growth in Johannesburg slowed to six percent. In the other metropolises such as Durban (nine percent), Port Elizabeth (seven percent), Cape Town (six percent) and Pretoria (five percent), rental growth was also curbed somewhat by rising vacancies. Given consumer inflation of 8.4 percent for the first quarter of 2009, this means real rental growth declined across all of the regions.

Office rentals have, thus far, remained fairly resistant to the scourge of the economic slowdown.

In the first quarter of 2009, impressive rental growth of 19 percent was still recorded in Pretoria and Durban decentralized, while in Cape Town and Johannesburg decentralized rentals were up by 14 percent and eight percent respectively. In the CBDs, Johannesburg produced the best performance with nominal rentals growing by a notable 24 percent. Rentals in Durban CBD were up by 20 percent while four percent growth was achieved in both the Pretoria and Cape Town CBDs.

On the industrial front, sharp contractions in retail sales and manufacturing output continue to suggest weaker demand for industrial space. "Unsurprisingly," says Rode, "rental growth across all major industrial conurbations has now been curbed to single digits." The strongest growth was recorded in the Central Witwatersrand, where rentals grew by eight percent; this was followed by Durban (six percent), the Cape Peninsula (four percent) and Port Elizabeth (one percent). Nonetheless, these growth rates were still good enough to beat the expected growth in building costs (-0.7 percent), thereby resulting in real rental growth.

The building industry, however, is about to enter intensive-care mode. Growth in the real value of new non-residential buildings put in place decelerated to a single-digit rate of eight percent in the fourth quarter of 2008. Not too bad if one considers the woes of the residential sector, where, unsurprisingly, the real value of new residential buildings put in place contracted by almost eight percent over the same period. "Another straw in the wind is cement sales," says Rode. "This is always a fairly good indicator of building-construction activity. These figures have been declining since the beginning of 2007."

On the back of the weak building activity, building-cost inflation has also waned. In the first quarter of 2009, the BER BCI’s measure of building-cost inflation — a good indicator of the health of the building industry because it includes non-residential contractors’ profit margins — is expected to have contracted, albeit slightly, by 0.7 percent. This is because contractors are now being forced to trim their profit margins due to keener tendering competition on the back of fewer new projects.

Good news is that capitalization rates — the non-listed property sector’s equivalent of the forward earnings yield of shares — seem to be topping. This one would presume was in response to lower interest rates. However, poorer prospects for real rental growth — especially on the retail and industrial property front — might yet put the brakes on investors’ willingness to continue to trade property at lower capitalization rates.

Article by: Rode & Associates www.rode.co.za