Office demand 'losing vigour' as services sector declines

Posted On Thursday, 19 July 2012 18:09 Published by
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Discouraging for the office demand and vacancy-rate outlook is the deceleration in output produced by the services sector GDP in the first quarter of the year


For now, no sudden improvement in the demand for office space can be expected as key demand drivers are losing their vigour. This is the opinion of property economist Erwin Rode in the latest issue of Rode’s Report on the S.A. Property Market who continues: ”Waning growth of output in the services sector does not bode well for its employment prospects, which in turn implies continued weak demand for office space. Furthermore, slumping business confidence is another bad omen for office demand; this as businesses are unlikely to expand premises or hire new employees while confidence levels are low.”

Thus, unsurprisingly, in the first quarter of 2012, office vacancy rates remained stagnant leading to unimpressive rental performances. In the reporting quarter, the only rentals that could muster any growth at all were those in Pretoria decentralized (+0,5%). Market rentals in Johannesburg decentralized remained at the same level they were a year ago, while those in Cape Town (-1%) and Durban decentralized (-2%) contracted slightly. eProp can report that the national office vacancy rate has gone up by a further 50 bpp to reach 10.5% in Q2 and supports the prognosis.

Weaknesses in the manufacturing and retail sectors — the two support pillars of the industrial property market — are likely to continue to place a lid on demand and, consequently, on rental growth. In the first quarter of 2012, only the Central Witwatersrand (at a growth of +10%) was able to buck the trend of poor yearly growth in rentals. In other major industrial conurbations, such as the East Rand (+3%), Durban (+0,5%), the Cape Peninsula (-1%) and Port Elizabeth (-2%) rentals either showed poor growth or contracted when compared to a year ago.

While it’s been a bumpy ride for capitalization rates over the past three years, the investment mood among direct (unlisted) investors remained fairly buoyant, no doubt spurred on by the drop in interests rates announced today. Rode elaborates: “Even amid the uncertain economic times, property investors refused to panic and this was in part due to the fact that, despite an upward trend since 2008, non-residential vacancy rates are still below their early 21st century highs.” A property’s vacancy rate has a direct impact on the perceived risk to its potential income. This will in turn affect the required income return (capitalization rate) at which investors will be willing to trade property.

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