Increase in rental income boosts sector

THE South African property sector was one of the best-performing global property markets last year, delivering a 15.2% total return — the highest increase in 18 years — thanks to an increase in rental income, according to the South African Property Owners Association (Sapoa)- IPD SA annual property index.

The last time the property sector saw this growth in total returns — that is, capital plus income growth — was in the 1990s, according to IPD SA MD Stan Garrun.

The sector’s marked upturn over the 10.3% generated in 2011 included income return coming relatively steady at 8.9%, while the uplift was provided by 5.8% capital growth.

Mr Garrun says SA joins a handful of countries globally experiencing even a mildly positive trend in returns. A pattern of declining performance has dominated last year’s results, reported to date, he says, even though positive total returns have still been achieved in all cases. Once again, non-European markets are tending to outperform those in European countries.

IPD SA research director Jess Cleland says the South African property sector has managed to achieve total returns of well above two- to five-year averages thanks to capital and income growth last year.

“We have seen important changes in capital growth, and rental growth is matching inflation. There is also divergence in the listed property sector,” she says.

The retail sector, and especially super-large and large shopping centres like Sandton and Eastgate malls in Johannesburg, and Canal Walk in Cape Town, continue to be star performers, with small shopping centres below 15,000m² feeling the pinch in a struggling economy.

Retail and industrial properties were once again star performers, coming off a base of lower vacancies and achieving higher returns than offices. Larger shopping centres in particular experienced high demand, which drove strong rental and capital gains.

However, office vacancies remain stubbornly high, resulting in a significant lag in performance by the sector on almost every metric. Retail property produced the highest total return of 17.1%, followed by industrial at 15.9%. Offices were well behind at 11.9%.

Mr Garrun says a real divergence in the market has occurred.

“Whereas we have seen a good turnaround for retail and industrial properties, concern remains over the health of the office sector, as evidenced by the high vacancies, particularly in the inner cities.

“Given the context of a moderateto-soft economic outlook and relatively low levels of consumer and business confidence, South African property has managed to once again prove its resilience.”

SA is among the few lucky countries to produce these sort of results in a weak global economy.

While the property sector performed well among its global peers, it still underperformed against both equities, which delivered at 20.6% (MSCI SA Equities), and bonds, at 18.2% (JP Morgan 7-10-year SA government bond index).

Property values were driven higher, in part, by a 132-basis-point bond yield firming over the year, although this growth was also underpinned by an overall aboveinflation rental growth of 7.2%.

The Sapoa-IPD property index is based on a sample of 1,669 properties with a capital value of R206.2bn at the end of December last year, which represents about 60% of the professionally managed investment property in SA.

Mr Garrun says that SA is one of just a handful of countries experiencing even a mildly positive trend in returns on property investments.

Investec Group chief economist Annabel Bishop says SA’s economy has experienced massive growth in the past 18 years, literally doubling in size. “This has helped the country fund improving living standards and this was achieved without increasing direct taxes. The country is still dealing with high unemployment, which is affecting consumer confidence,” she says.

Ms Bishop says there are some structural concerns due to the high debt levels of households.