MAIN IMAGE: Erwin Rode
Staff writer
The highly recommended Rode Report that analyses and reports on most sectors of the property market in the metropolitan areas and some secondary cities, was recently released for Quarter 1 of 2022.
The following are the significant findings or conclusions made in this issue of Rode’s Report:
- The Russia‐Ukraine war has raised expectations of higher inflation and interest rates and at the same time increased worries about global economic growth.
- The industrial property market continues to look best placed.
- The retail market is performing better
- The office market is still in the doldrums, but there are some positive signs emerging, like the better market rentals compared to the end of 2021 and only marginally higher vacancies.
- Flats are filling up slowly, but real rentals, like house prices, are still in negative territory.
Office market
The office market continues to be worst placed of the different property types, with the national decentralized vacancy rate (for grades A+, A and B combined) increasing further, albeit marginally, to 4,4 points in the first quarter of 2022, up from 4,3 points in the fourth quarter of 2021, according to Rode’s office vacancy survey.
This equates to an average vacancy rate of 14,7%, still way above the long-term average of 8,8% since 2000. The oversupply of space means tenants are spoilt for choice and clinching fantastic deals, which includes lower rentals. Rode’s latest office market survey shows that, nationally, market gross rentals for decentralized grade‐A space decreased by 2% year on year in nominal terms in the first quarter of 2022, thus declining for the seventh consecutive quarter
Encouragingly, the decline in rentals has eased gradually since the middle of 2021 when rentals fell by around 6% compared to a year earlier. Rentals are up about 1% from the fourth quarter of 2021. This could be an early sign that the worst is over and that rentals are stabilising at lower levels as more workers trickle back to offices with Covid becoming less of an issue.
However, there is one caveat – these rentals are nominal rents, meaning no rental remissions, tenant installation allowances or several months rent‐free are assumed.
Industrial market
Relatively speaking, the industrial property market continued to shine in the first quarter of 2022, with nominal rental growth picking up to 4,1% year on year thanks to continued low vacancies amid a recovery in the manufacturing and retail sectors. In real terms, rentals increased at about the same pace as building‐cost inflation (BER BCI). Looking at the bigger picture, nominal rental growth has accelerated after growing by 0,5% in 2020 and 2,2% in 2021. This means the industrial sector is still comfortably the best placed of the major non‐ residential sectors, where vacancies are much higher, especially in office properties. One of the key reasons for the out-performance of industrial property is the largely non‐ speculative nature of developments.
Within the industrial segment, logistics has been doing exceptionally well. Nominal rentals for prime industrial space of 500 m² grew by 6,7% year on year in Cape Town in the first quarter of 2022, remaining above pre‐Covid levels. This was the strongest growth of the major industrial conurbations.
The Mother City’s vacancy factor decreased sharply to 3,1 (on our vacancy scale), which implies a vacancy percentage of just above 5%. This has been the lowest vacancy rate since the end of 2020.
Residential market
The housing market had a steady start to 2022, with nominal prices in the first two months growing by 3,8% year on year, albeit slightly slower than the 4,2% growth for the full 2021. However, in real terms the story does not seem so rosy, with house prices falling by about 2% so far in 2022 due to the sharp rise in consumer inflation to 5,7%.
At this stage, it is highly likely that real house prices will decline for the seventh consecutive year in 2022. Slower house price growth was expected as many of our avid Rode Report readers will know, given the fading impact of low interest rates amid record‐high unemployment and an economy that is struggling to get back to pre‐pandemic levels. At this stage, the impact of the interest rate hike is not significantly slowing prices and volumes, but one would expect this to change as rates increase further.
Inflation and interest rate expectations have generally been raised since December due to the impact of further increases in fuel and food prices because of the Russia‐Ukraine war. The crucial question is by how much interest rates will be hiked and how swiftly. Nobody has a definitive answer to this one.
Turning to flats, vacancy rates averaged 9,9% in the first quarter of 2022, down slightly from 10,2% in the fourth quarter of 2021, according to Rode’s residential survey data. Generally, vacancies have improved after hitting a peak of 13,1% in the fourth quarter of 2020. However, vacancy rates remain well above the 5,3% average recorded in the three years 2017 to 2019 that preceded the pandemic, implying that they are still relatively high. High vacancy rates have put significant pressure on rentals.
