Electricity crisis could affect property values

Capitalization rates — the property equivalent of the forward earnings yield of shares — have remained put despite a deteriorating inflation and interest rate outlook. This is according to the latest Rode’s Report on the South African Property Market which reports on surveys conducted during the fourth quarter of 2007.

However, notes property economist Erwin Rode: “With local growth prospects that have become more shaky as a result of a more precarious international growth outlook and supply constraints, most notably electricity, capitalization rates could come under some pressure as investors reassess the risks.”

Moving on to property fundamentals, the report notes that office market rentals in the decentralized nodes of Johannesburg and Cape Town continued to show strong growth and were up by as much as 20% on a year earlier. In contrast, office rental growth in the decentralized nodes of Pretoria and Durban was only up by 10% and 5% respectively.

With the exception of the Durban CBD, whose rentals were 2% lower than a year earlier, rentals in the major CBDs showed robust growth. Cape Town CBD led the pack with year-on-year rental growth of 27%, followed by Pretoria CBD with 26%, and Johannesburg CBD with 25%.

On the industrial front, interruptions in electricity supply have also begun to impact on the mood of local manufacturers. Although this could impact negatively on the demand for industrial space, Eskom’s moratorium on electricity certificates for new developments could support rentals in the medium term. During the fourth quarter of 2007 industrial rentals in Central Witwatersrand were around 30% higher than a year earlier, in the Cape Peninsula 25%, in Port Elizabeth 22%, and in Durban 14%.

After a decade of inflation-beating growth, flat rentals have performed disappointingly over the past two years, with rentals in only Johannesburg and Durban being able to record growth in excess of consumer inflation.

High real house prices, increasing interest rates, and stricter vetting criteria by banks, continued to drive the deceleration in house-price growth during the reporting quarter.

As a result of this, residential building activity has been decelerating for some time, while – in contrast - on the non-residential front building activity has been posting higher yearly growth rates. However, recent data on new building plans passed suggests a possible future cooling in activity across both sectors. The Eskom constraint would reinforce this trend.

With regard to building-cost inflation, the Haylett index, which measures construction’s input costs, is expected to have grown by roughly 9% year-on-year during the fourth quarter of 2007. High oil prices are seemingly at the root of the cost inflation of key construction materials, while prevailing shortages in skilled labour are also adding upward pressure on labour costs. The BER building-cost index, which measures construction’s input costs plus the profit margins of contractors, is expected to have grown by about 15% over the same period. The difference between these figures shows the extent to which building contractors were able to stretch their profit margins over this period.

“However, considering the possibility of diminishing building activity and the resultant increase in competition among contractors, it is likely that this gap will start to narrow,” adds Rode.

Article from: www.sapropertyinvestor.co.za