Capitalisation rates — a measure of the price paid for property relative to the income generated by it — 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 shakier as a result of a more precarious international growth outlook and supply constraints, most notably electricity, capitalisation rates could come under some pressure as investors reassess the risks.”

Strong office rentals

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

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

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 percent higher than a year earlier, the Cape Peninsula was up by 25 percent, Port Elizabeth registered an increase of 22 percent while Durban’s industrial rentals went up by 14 percent.

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

The deceleration in house-price growth continues

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 nine percent 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 skills shortages 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 percent 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.