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State of the property market – green shoots appearing

MAIN IMAGE: Kobus Lamprecht, Rode and Associates

Danie Keet

In the quarterly review of the South African property market by Rode and Associates a general decline in most sector of the industry is observed.

According to Kobus Lamprecht, Editor of the report, the  property sectors continue to be negatively affected by increased concerns about global and South African economic growth due to higher inflation and interest rates.

“With  reference to the world economy, the IMF on 11 October warned ‘the worst is yet to come and, for many people, 2023 will feel like a recession’”.

“The  industrial property market, especially warehouses linked to logistics, continues to stand strong, despite the weakening economic backdrop. Green shoots are appearing in the office property market, but fundamentals generally are still poor. Capitalization rates of the retail property market are edging up, reflecting the weak outlook for consumer spending.

“Flat vacancy rates and rentals have improved further, but real rentals, like house prices, are still in negative territory. Building‐cost inflation remains in the double digits, which makes it almost impossible  for rentals to grow in real terms, suppressing new developments.

“Cape Town is outperforming the rest of the country based on Rode’s office, industrial, flats and retail data,” Lamprecht said.

Office market

Lamprecht wrote in the report research indicated that the office market continues to be in the worst position of the three major non‐residential property types due to its severe oversupply. However, the results of the latest Rode survey show that  green shoots are appearing in the market as vacancy rates improved further in the third  quarter of 2022, while nominal rental growth turned positive.

Fundamentals are poor but improving somewhat. However, gross market rentals for decentralized grade‐A space increased by 2% in nominal terms in the third quarter of 2022 compared to the third quarter of 2021, the first year‐on‐year increase in two years.

To put it in perspective, this increase comes from a very low base as the third‐quarter level of  last  year was the lowest during the pandemic. Nonetheless, the market has been boosted by the return of workers to offices, with Covid becoming less of an issue.

Regionally, Cape Town looks to be turning over a new leaf, but rentals are also edging up in Johannesburg and  Durban. Rentals for all off the major cities are still lower than pre‐Covid levels, meaning that the office market is still generally feeling the pain. In the third quarter of 2022, grade‐A nominal rentals increased by 7,6% in Cape Town decentralized compared to the third quarter of 2021. Grade‐A rentals increased by 3,8% in Johannesburg and by 1% in Durban.

Industrial market

The industrial property market continues to be the cream of the crop due to its superior rental growth and low vacancies. Nominal rental growth for space of 500 m2 rose by 5,3% compared to the third quarter of 2021.

The market has been boosted by continued low vacancies, especially for warehouses linked  to logistics, which stems from the strong online retail sales market. This growth compares to the 5,4%  in the second quarter, which implies a slight cooling in the accelerating trend observed since  the middle of 2021. Looking at the year so far, rental growth has averaged 5,1%, well up from the 2,2% for the full 2021. However, the story is not so rosy in real terms, as building‐cost inflation (BER  BCI)  is still elevated at about 11%.

Regionally, Cape Town is looking as fresh as a daisy, with nominal industrial rentals for prime space  of 500 m² up by 6,7% year on year in the third quarter of 2022, remaining  above pre‐Covid levels,  as the demand for space exceeds supply. This was the strongest rental growth of the major industrial  conurbations, despite growth slowing somewhat from the 7,2%  in the second quarter of 2022. The  Mother City’s industrial vacancy rate also declined further. Vacancies remain the highest in the West Rand,  Gqeberha (PE) and Bloemfontein at between 5% and 10%.

Residential market

The housing market continues to slow as expected, with nominal prices growing by 3,3% in the third quarter of 2022 compared to the third quarter of 2021, based on FNB data.

This is down from the 3,8% growth recorded in the second quarter as the higher cost of living and  rising interest rates eat into demand. This brings growth to 3,7% over the first nine months, marginally slower than the 4,2% growth for the full 2021. It implies that house prices are still declining sharply in real terms, with the consumer inflation (CPI) rate averaging 6,6% so far in 2022.

At this stage, the impact of interest rate hikes is only having a marginal impact on prices and volumes,  as these remain relatively low by historical standards, while banks are also competing for home loans by, for instance, reducing deposit requirements. Regionally, activity in the Western Cape was perceived to be the strongest of the major provinces, but it has also slowed.

Turning to flats, vacancy rates in South Africa averaged 7,8% in the third quarter of 2022, down  from 8,8% in the second quarter of 2022, according to Rode’s residential survey data. This means  vacancy rates continue to improve after hitting a peak of 13% in the fourth quarter of 2020. The improvement in vacancy rates has led to better‐performing nominal rentals but note that rental growth is not shooting out the lights. This suggests that property owners have generally tried to  keep rental increases low to reduce vacancies. Regionally, Cape Town’s flat vacancy rate fell to 4%,  to the surprise of Rode. All in all, house prices and rentals are still declining in real terms in most parts of the country.

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