Rode’s Report on the South African Property Market Sarah-Jane Meyer • Aug 2, 2022
According to Rode’s Report on the South African Property Market Q2 2022, South Africa’s property sectors are being negatively affected by increased worries of local and global economic growth amid even higher inflation and interest rates than were expected in the Rode Report for the first quarter.
“On July 6, the head of the International Monetary Fund said the outlook for the global economy had “darkened significantly” since April 2022, and she could not rule out a possible global recession in 2023 given the elevated risks,” says Rode Report editor, Kobus Lamprecht,
The report showed that the office market continues to be in the worst position of the three major non‐residential property types due to its severe oversupply characterised by high vacancy rates and lower rentals.
However, the latest Rode survey shows that vacancy rates improved slightly during the second quarter of 2022, with the decline in nominal rentals generally less than seen before. In other words, fundamentals are poor but improving to a certain extent. At this stage, it is too soon to tell if this positive move will be sustained given the slow economic growth expected and the work-from-home trend, says Lamprecht.
“Nationally, gross market rentals for decentralised grade-A space decreased by 1% year-on-year in nominal terms. Encouragingly, the decline in rentals has eased gradually since mid-2021, when rentals fell by around 6% compared to the previous year. This may mean the worst is over as rentals are stabilising at lower levels as more workers return to offices.
“It’s important to keep in mind that the above are nominal rentals, so there are no rental remissions, tenant installation, allowances, or a number of months rent-free assumed. In real terms, rentals fell by more than 10% after deducting building cost inflation (BER BCI) which accelerated to about 13% during the second quarter. This was driven by double-digit increases in the prices of steel and copper.”
The report shows that regionally, Cape Town has been the best performer, with nominal rentals (+1.2%) rising to above those of a year ago. However, rentals for all the other major cities were either unchanged or declined compared to the same period in 2021, indicating that the office market is still largely feeling the pains.
“No other major city managed to record above-inflation rental growth. With the sharp rise in building costs, real rentals have dived into double digits.”
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The report shows that the industrial property market continued to shine during the second quarter of 2022, with nominal rental growth for a space of 500m2 picking up to 5.4% year-on-year due to low vacancies.
Lamprecht says the current growth of 5.4% can be compared with growth of 0.5% in 2020 and the 2.2% in 2021.
“However, the story is not so bright in real terms given the spike in building cost inflation. In any event, this sector is comfortably the best placed of the major commercial sectors where vacancies are much higher and above their long-term average, especially office assets.”
The report notes that one of the key reasons for outperformance in the industrial sector is the largely non-speculative nature of developments. Another performance driver has been the superior performance of logistics due to the online sales boom, which has accelerated during the pandemic. But the fundamentals of this sector may be close to peaking, given the weakening economic backdrop, which is likely to curb the sharp growth of logistics and warehousing demand through weaker online sales.
In Cape Town, nominal rentals for a prime space of 500m2 grew by 7.2% year on year during the second quarter of 2022, remaining above pre-pandemic levels as the demand for space exceeded supply. This was the strongest rental growth recorded of the major industrial conurbations.
The vacancy factor in Cape Town continued to decline, implying a vacancy percentage of below 5% – the lowest rate since the third quarter of 2020. Nominal rentals in Central Witwatersrand and Durban also continue to perform well, with growth picking up to 5.8% and 6.6%, respectively. Fundamentals in Durban are looking better as the July 2021 looting, and 2022 floods have created a shortage of space in some areas resulting in a vacancy rate of just under 4%, which is better than the national average. Rental growth in the East Rand was more subdued at 2.4%.
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The housing market showed a steady start in 2022, with nominal prices growing by about 4% year-on-year during the first five months. This was marginally slower than the 4.2% growth for the entire 2021, based on FNB data. However, house prices have fallen by about 2% in real terms in 2022 due to the sharp rise in the average consumer inflation rate to 5.9%.
According to the latest monthly data, nominal house prices increased by 3.7% year-on-year in May, slowing from 4% in April. This is well below the inflation rate of 6.5% in the same month.
“At this stage, the impact of interest rate hikes has not significantly slowed prices and volumes, but it will increasingly play more of a role in curbing effective demands as it increases towards its pre-pandemic level of 10% sooner rather than later,” says Lamprecht.
The Rode Report says that house prices are expected to grow more slowly over the next year due to the weaker economy, characterised by high unemployment. And as interest rates rise further, this will place additional pressure on consumers who are also facing inflation. Real house price growth is still a few years away, says Lamprecht.
According to Rode’s residential survey data, flat vacancy rates averaged 8.8% in the second quarter of 2022, down from 9.9% in the first quarter.
“The improvement in vacancy rates has led to slightly better performing nominal rentals. However, these are still declining in real terms, which means that landlords are generally feeling the heat as total costs, including items like rates and taxes and maintenance, are rising faster than their rental income.”
It is significantly more expensive to maintain a home now compared to last year due to the increasing prices of metals such as steel. Higher interest rates are also lifting bond instalments, and Lamprecht says there is little prospect of flat rental growth in the near future as it will be difficult for landlords to pass on sharp cost increases to tenants in the current difficult and worsening economic environment.
“A realistic scenario is that nominal rentals will probably continue to rise slowly in the next year or so but at a rate lower than the consumer inflation rate,” he says.
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The Rode Report shows that listed property prices lost more ground in the second quarter, with the SAPY Index 15,6% lower at the end of June than at the end of December 2021.
This came after an excellent 2021 when listed property prices rebounded by about 26%. The main reason for the pullback was fears about lower global and SA economic growth, with the World Bank and the IMF both downgrading their world‐economy forecasts for 2022 during the quarter.
Some of the key reasons are accelerating inflation and rising interest rates - both of which have been amplified by the Russia‐Ukraine war, which started in February and is still ongoing.
“This, together with the electricity supply crisis locally, has negatively impacted consumer and business confidence. In such an uncertain environment, households will hold back spending, which will be negative for the economy and property fundamentals,” says Lamprecht. .
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