Dear Valued Clients,

As we navigate through the second half of 2024, it is essential to reflect on the dynamics shaping the South African property market, particularly in the industrial and office sectors. At Swindon Property, we remain committed to providing our clients with insightful analysis and strategic guidance that reflect the realities of the current landscape and how we perceive the potential changes to this market for the year ahead. The second quarter of 2024 has presented a mixture of challenges and opportunities, as detailed in the latest SAPOA reports.

In the Industrial Sector, we continue to witness robust performance, driven by strong demand and favourable structural trends. Conversely, the office market is showing signs of stabilization, though it remains influenced by varying regional dynamics and the evolving post-pandemic work environment. Below is an in-depth look at the key findings for these sectors in Q2 2024.

Industrial Property Sector

The Industrial Property Sector in South Africa has continued to perform strongly, showcasing resilience in a challenging economic climate. According to the Industrial Property Trend Report H1, the sector delivered a total return of 11.2% in 2023, making it the top-performing real estate category. This performance is largely driven by robust occupier demand and the lowest vacancy rates since 2007.

Key factors contributing to this growth include:

  • Net Operating Income Growth: The sector experienced a 4.5% increase in net operating income, despite the challenges posed by higher interest rates which reduced capital growth by 2.5%.
  • E-commerce Boom: The surge in online retail, which grew by 29% in 2023, significantly boosted the demand for distribution centers. This trend has been a critical driver of the industrial property sector's success, with capital investment increasingly directed towards these assets over the past five years.
  • Stable Investor Interest: Investor allocation to industrial properties has remained steady, reflecting confidence in the sector's long-term prospects. The performance spread of industrial total returns has also narrowed, indicating a more uniform market upswing.
  • Operational Costs: Operating costs in the industrial sector rose to 43.1% of gross income. Despite this, the industrial sector remains the only property category to consistently achieve positive net operating income growth over the past five years.

Challenges such as issues at South African ports and low production capacity utilization have shifted investor focus toward distribution and logistics properties, further bolstering this sector. Despite the broader market experiencing muted transaction activity, industrial property has accounted for a significant 23% of deal volume for transactions exceeding R46 million per property over the past five years.

Office Property Sector

The office property market in South Africa is showing signs of recovery, albeit with mixed results across different grades and locations. According to the SAPOA Office Vacancy Survey for Q2 2024, the overall vacancy rate has improved for the eighth consecutive quarter, now standing at 14.2%, a 50 basis point reduction from the previous quarter.

Key findings include:

  • Rental Growth and Vacancy Rates: The ongoing improvement in vacancy rates has come at the cost of rental growth, which has been declining year-over-year since 2019. However, in Q2 2024, office asking rents rebounded to +0.8%, signaling a potential shift towards equilibrium in the market.
  • Prime and Secondary Office Performance: Prime offices have seen the most significant improvement, with vacancy rates decreasing by 160 basis points to 7.8%. A and B-grade offices also saw improved vacancy rates, while C-grade offices experienced a slight deterioration.
  • Geographic Disparities: The City of Cape Town boasts the lowest overall office vacancy rate at 6.3%, marking its lowest level since 2009. In contrast, Johannesburg continues to struggle with high vacancy rates, albeit improved from previous years, standing at 16.9% in Q2 2024.
  • Development Activity: The office development pipeline remains subdued due to persistently high vacancy rates and attractive rental prices for existing properties. Developers are proceeding with caution, as evidenced by the high pre-let rate of 85% for new developments, the highest in the 34-year history of the survey.

While the office sector is on a gradual path to recovery, the prevalence of troubled assets—where more than 70% of vacant office areas are in buildings with over 30% vacancy—continues to exert downward pressure on rental growth. This situation could result in competitive rental incentives that might impact overall market stability in the short term.

Overall, the industrial property sector continues to lead the market, with sustained investor interest and demand driven by structural shifts in the economy. The office sector, while improving, still faces significant challenges as it navigates a complex post-pandemic environment with the looming promise of interest rates cuts.

I am pleased to note that Swindon has performed well against the backdrop of the economic climate, we continue to grow our footprint across the major provinces and in Sub Saharan Africa through our Savills affiliated appointments. Our property management division has secured some exciting new mandates in Cape Town and Durban as we continue to push the growth of this division and our brokering business in conjunction with our Occupier Service & Valuation Division's has concluded a number of significant transactions across the country.

Sincerely,

Andrew Dewey