Overall, the growth in market rentals for office space is still weak. According to the latest Rode’s Report on the SA Property Market, this is especially evident in Cape Town (-6%) and Johannesburg (-4%) decentralized, where rentals were, on average, lower than they were a year ago. But, this comes as no surprise in light of the faster northward march of prime-office vacancies in these two decentralized regions.

In contrast, robust rental growth in Pretoria (+9%) and Durban decentralized (+10%) was still evident.

Even on the industrial front, nominal rentals have continued to shrink – despite the upward movement in the fourth quarter of 2009 in manufacturing output and capacity utilization. The Central Witwatersrand, Durban, Port Elizabeth and the Cape Peninsula all registered lower nominal rentals than a year earlier. “However,” notes Rode, “because building-cost inflation has actually declined by 9%, we have the anomalous situation that real rentals have actually shown positive growth.”

Flat rentals also remained stagnant for the most part. While Durban mustered a growth of 4%, Johannesburg, Pretoria and Cape Town showed rentals roughly at the same level of a year ago. Port Elizabeth showed the poorest performance as rentals contracted by 2%.

Comments Rode: “This stagnation is indicative of the financial stress being experienced by both incumbent and prospective flat tenants. Usually, during tough economic times, ‘doubling up’ occurs on a large scale, keeping the demand for rental residential space in check.” An example of doubling up is children moving in with their parents.

After weakening during 2008, owing to uncertain economic conditions both locally and abroad, capitalization rates finally turned the corner in the first quarter of 2009, heading marginally south and sideways once again. Capitalization rates are the property equivalent of the forward earnings yield of shares; this implies that declining capitalization rates result in rising market values, and vice versa.

However, at the moment opposing forces seem to be playing tug of war with the future direction of capitalization rates, says Rode: “On the one hand, scaled-down expectations regarding the direction of real rentals and the possibility of rising long-bond yields could now result in upward pressure on capitalization rates. This is due to the increased government debt issuance needed to fund the budget deficit.

“On the other hand, the fact that South African landlords are generally not under the same duress to sell as their overseas counterparts in the USA and elsewhere, could mean that the most likely direction of capitalization rates for now may be sideways.”