Farm Index points to mild weakening

The FNB National Farm Valuations Index suggests that the Farm Property Sector's performance has just started to go off the boil a little in the 2nd half of 2010 after something of a mini-recovery in the 1st half of the year.

During the decade recently past, South Africa's farm property sector also experienced a boom, as did the residential and commercial property sectors. The half yearly average national farm valuation reached a year-on-year growth peak, in the 2nd half of 2008, of 47.5% before tapering off to record a -4.4% year-on-year decline in the 2nd half of 2009. 2010 has looked similar to the residential "mini-recovery", having recovered to 15.2% positive growth in the 1st half of the year before slowing to 8.5% year-on-year in the 2nd half of 2010 to date. Comparing the 2nd half of the year's farm valuation average with the 1st half of the year, there has been some decline in average value, from an index value of 244 in the 1st half of the year to a 224 average for the 2nd half to date.

The FNB All Commercial Property Indices, by comparison, point to a continuation of the strengthening trend for the commercial property sector in the 3rd quarter of 2010 (these indices have an upper price cut-off of R50m). After some weakening in the overall Commercial Property Market through 2008 and a part of 2009, the market has seen something of a strengthening from the latter stages of 2009 through to the 3rd quarter of 2010. 2 indices that point to this are the FNB All Commercial Capitalisation Rate (Cap rate) Index, which has been declining mildly since a peak reached in the 2nd quarter of 2009, and the FNB All Commercial Vacancy Rate Index, which subsequently started to show a declining trend as from the 2nd quarter of 2010. This is a function of the impact of an economy turning to positive growth late in 2009, while a sharply lower cost of finance since 2008 also helps the cause.

While IPD data for the 1st half of 2010 shows still-mediocre returns for all main commercial segments, examining both Rode and IPD data for the 1st half of 2010 would suggest that office space may have showed slightly better performance than industrial and warehouse property to date, with retail property possibly somewhere in the middle. The slightly weaker industrial and warehouse property sector returns may be the net result of manufacturing being the hardest hit sector during the 2008/9 recession, compared to other economic sectors, a reduction in the inventory-to-GDP ratio in SA since 2008, while industrial and warehouse building completions appear to have held up best in recent times (bad from a market balance point of view).

Nevertheless, it is believed that the fundamentals of all 3 major commercial property segments have slowly improved as a result of the recession having passed by, and building completions having dropped albeit to varying degrees (although this hadn't translated into improved retail and industrial property returns in the 1st half of 2010 yet, only in office space returns, according to IPD data).

And so, unlike the residential market, which has shown signs of weakening since a stage of the 2nd quarter, or the Farm Property Market, the FNB All Commercial Indices continued to point to a still-mildly strengthening commercial property sector in the 3rd quarter.

Going forward, the continuation of this trend will depend much on the pace of real economic growth, which is required so as to increase commercial property demand in order to reduce vacancy rates further, and boost what is currently still weak rental inflation according to available data.

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