South Africa's commercial real estate market returned to double-digit annual performance last year, with a 13.3%, bouncing back from 2009's eleven-year low of 8.8%, according to the SAPOA / IPD South Africa Property Index.
The headline total return is still dominated by the income component, which was 8.9%, while capital growth was 4.1%. After 18 months of little-to-no capital growth, confidence and fundamentals began their recovery over the second half of last year, during which period the bulk of the year's annual capital growth was delivered.
Sector Performance: Stronger retail sales growth and signs of a return to discretionary spending 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 due to concerns over fundamentals in the secondary markets.
Above inflation rental growth continued to underpin the majority of returns, and rose by 130bp 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 12bp yield firming, office and industrial properties saw a softening of yields, by 7bps and 33bps respectively. A noticeable increase in the yield spread between 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, again, there is 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 neighborhood shopping centres. At the end of 2010 vacancies stood at 5.2% for retail, 10.6% for offices and 5.4% for industrial.
Stan Garrun, Managing Director of IPD South Africa, commented: "Given that the IPD Index covers two thirds of investment property in SA, we can draw 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 is only to 2008 levels, but it is income which again continues to drive returns and sets South African property apart. As we enter the next recovery phase it will be the good management of property fundamentals that enhance these income streams, and that will distinguish investors in the market."
The South African results mirror those already announced by 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, to date beaten by the UK (15.1%) and the USA (14.2%) who both produced a more pronounced bounce back, though from a more severe downturn than South Africa.
Other asset classes in South Africa benefitted from many of the same macro-economic forces driving the stronger property returns. The JSE All Share produced a solid 19.0% return, while the listed property sector PUTs and PLSs both outperformed the broader equities market with returns of 25.5% and 30.9% respectively. These returns were supported by a firming long bond yield, which returned 15.7% for the year.