After 18 months of little to no capital growth, confidence and fundamentals began their recovery over the second half of last year, during which the bulk of the year’s annual capital growth was delivered.
The headline total return was still dominated by the income component, which was 8,9%, while capital growth was 4,1%.
IPD South Africa MD Stan Garrun says that, given that the IPD Index covers two-thirds of investment property in South Africa, it could be inferrred from these results that the investment property market is undergoing a sustainable, though drawn-out, recovery.
“While capital growth has nudged back into positive territory, it [has only recovered] to 2008 levels but it is income which, again, continues to drive returns and sets South African property apart. As we enter the next recov- ery phase, it will be the good management of property fundamentals that enhances these income streams, and that will distinguish investors in the market,” explained Garrun.
Stronger retail sales growth and signs of a return to discretionary spending have helped to drive capital growth in the retail sector to 4,4%, the highest of any sector. Office and industrial capital growth – at 3,9% and 3,2% respectively – were slightly more subdued, in part owing to concerns over fundamentals in the secondary markets.
Above-inflation rental growth continued to underpin the majority of returns, and rose by 130 basis points to 7,4% in 2010, though yield movements remained conservative across all sectors. While the optimism surrounding the retail sector was reflected in a slight 12 basis points yield firming, office and industrial properties saw a softening of yields, by 7 basis points and 33 basis points respectively.
A noticeable increase in the yield spread among market segments underlined the significant performance variation between prime and secondary assets.
Across the market, vacancies decreased from 7,4% in 2009 to 6,6% in 2010 but there was a clear split between prime and secondary. Large shopping centres and prime offices remained well let but vacancies continued to rise in secondary markets, such as B- and C-grade offices and neighbourhood shopping centres.
At the end of 2010, vacancies stood at 5,2% for retail, 10,6% for offices and 5,4% for industrial properties.
The South African results mirror those already announced by the IPD in other countries around the world, with 2010 returns generally outperforming expectations.
For the first time in eight years, the South African return was not the highest of the 23 markets reported on by IPD, beaten by the UK (1,1%) and the US (14,2%), which both produced a more pronounced bounce-back, though from a more severe downturn than South Africa’s.
Eris Property Group CEO Warren Schultze adds that the Sapoa/IPD Property Market Index has become the pre-emptive benchmark for measuring unlisted property returns, and has added to the credibility of the asset class in South Africa.
“The index has undoubtedly supported the investment case for both South African investors and assisted in showcasing the merits of South African property investment to international investors,” he concludes.