Property fundamentals weakened over the past two years with higher arrear rentals, bad debts and increasing vacancies.

Hardest hit in terms of vacancies was the offi ce sector which recorded a vacancy fi gure of 9.9% in December 2010, followed by the industrial sector with vacancies of around 8% and the retail sector with vacancies around 4%. Offi ce rentals remained fl at due to landlord concessions to retain current tenants or to attract new tenants. 

In spite of the generally weak trading conditions, the SA listed property sector recorded a total return of 29.6% for the 2010 calendar year, outperforming the other traditional asset classes over the short and longer investment time horizon.

The strong performance during 2010 was supported by a good performance of the capital markets and fi rming long bond yields. At 31 December 2010, the historic rolled income yield for SA listed property was 7.7%. The outlook for distribution growth in 2011 remains reasonable with expected distribution growth between 6% and 7%. Rising discount rates, due to an expectation of higher bond yields, will probably have a negative impact on capital growth during 2011.

In general, a gradual and varied recovery is expected during 2011. Vacancies remain a concern, but are expected to gradually decrease during the year. An upward movement in offi ce rentals will most probably only be seen once vacancies have reduced substantially. 

The general outlook for the retail property market is more optimistic with some retail sectors performing better than others due to changing demographics, the growing middle class, government grants, etc.

The fact that operating costs will continue to rise faster than income growth, mainly due to rates and taxes and electricity charges, remains a huge concern for the industry.

Although most of these costs are normally recovered from tenants, they will impact on tenants’ total cost of occupation and could ultimately reduce rental growth for landlords.

The construction industry is still going through a tough time. Due to fewer new developments and a lag on government infrastructure projects, this is expected to continue into 2012.

The impact of the Consumer Protection Act, which came into effect in April 2011, on the commercial property industry remains unclear while industry bodies are seeking clarity on some provisions of the Act. While the Act provides additional protection for consumers, it might have severe implications for landlords, developers and owners.