Office and industrial property rentals continued to grow impressively, according to the latest issue of Rode's Report on the SA Property Market issued on Monday.

In spite of this, building plans approved for new office and industrial buildings were slowing down markedly, the report said.

"No doubt, this anomaly is the result of the uncertain international environment and high interest rates," said Rode's Report editor John Lottering.

"In tandem with these risk factors, capitalization rates are also weakening slightly. This possibly reflects the lagged impact of rising interest rates."

However, Lottering said it must be remembered that cap rates were not determined only by interest rates, but that investment demand and prospects for capital returns also played a role.

"Fortunately, when interest rates started rising in the second half of 2006, property fundamentals were ? and mostly still are ? quite strong."

Lottering said that barring a severe economic slowdown, he expected continued strong property fundamentals to keep capitalization rates from moving too far north.

In addition, the now improved outlook for inflation brought on by the reweighting of the CPI, lower oil and food prices as well as the 'base effect' might also help in keeping capitalization rates at bay, he said.

However, a weakening Rand exchange rate posed a severe threat to inflation.

"Thus we do not expect interest rates to come down to their levels of 2006 any time soon and capitalization rates might have seen their best levels for a long time to come."

Lottering said that good news was that office rentals had continued to record impressive growth.

Nominal rentals in top decentralized office areas such as Pretoria (+21 percent), Cape Town (+16 percent) and Johannesburg (+13 percent) all managed to achieve growth in excess of the expected growth in building costs of 10 percent, he noted.

In Durban decentralized, market rentals were, on the whole, only four percent higher than a year ago.

Rentals in the industrial market had also shown vigorous growth with prime industrial rentals up by as much as 26 percent in Durban and by 18 percent in the Cape Peninsula and the Central Witwatersrand.

Port Elizabeth recorded the weakest growth at only 11 percent higher than the same quarter a year earlier.

Lottering said that rental growth in all major industrial nodes had managed to keep ahead of building costs.

However, he pointed out that overall economic growth was still expected to ease to about 3 percent per annum over the next few years. "This is much lower than the 5 percent per annum we've been enjoying since 2004; thus, combined with the ongoing constraint on energy supplies, we could, therefore, expect to see a moderation in these growth rates as compared to the past few years."

Turning to the housing market, he said that house-price growth was expected to continue drifting lower from its peak at the end of last year.

"And as one would expect from this, building activity in the residential sector is declining."