As we head towards the final quarter of 2023, it is worth noting how the property market has fared against the economic and political instability seen over the last eight months, both in South Africa and abroad. Foreign investor confidence has slumped since Q4 2022, the listed property sector continues to seek greater diversification against the rand, and our local electricity challenges, together with double-digit increases in our municipal rates, have placed additional pressure on our operating costs and therefore net returns, as landlords struggle to find a balance between attracting and retaining tenants versus the pressures of rising operating costs and interest rates.
According to our international affiliate, Savills, Globally, while economic growth has proven to be resilient this year, this is supporting ‘sticky’ inflation, compelling central banks to increase interest rates in response. As expected, this is weighing on sentiment across real estate markets, and as a consequence, transaction activity remains subdued. Much of the negativity is focused on the US office sector, which impacts markets across the world. Nevertheless, with a prime yield of 5% or higher in markets such as the cities of London and Sydney, investors are showing renewed interest. In the logistics sector, despite the slowdown, many metrics across both capital and occupational markets are broadly comparable to pre-Covid levels, suggesting a normalisation in activity. Furthermore,a positive rental growth outlook supports investor confidence in the sector.
In the global office sector, commercial real estate is in a state of stasis that makes it very difficult to say anything new at present. There is still some liquidity, particularly for smaller lot sizes where cash-rich private investors continue to capitalise on the lack of competition from the big players. However, the US$33.1 billion in completed office transactions in Q2 globally was more than 60% down on the year, setting a new post-Global Financial Crisis low (beating the previous record set in Q1).
In the global logistics sector, many metrics across both capital and occupational markets are broadly comparable to pre-Covidlevels, suggesting a normalisation in activity in the logistics sector. Notably, investors have not wavered in their conviction for logistics through this down cycle, but have pragmatically chosen to sit out the volatility – and the tide is beginning to turn. A yield of around 5% in the US, Australia, and the UK is beginning to look attractive again, given prospects for more stability in interest rates over the coming 12 months and continued upward pressure on rents.
Not surprisingly, the lack of market activity provides very little transparency on pricing. The cost of debt remains largely prohibitive for large institutional buyers, and vendors are thus reluctant to bring new assets to the market, knowing that price discovery continues to work against them. Against this backdrop, current risk premiums appear meager considering the level of uncertainty in the market and certainly do not reflect the prevailing bearish sentiment.
With 2024 being an election year in South Africa, it is likely going to disrupt the market as investors cautiously monitor the impacts, including whether a combined opposition party has the ability to face off against the governing party.
GDP numbers have now shifted with Cape Town overtaking KwaZulu-Natal as the second largest commercial hub in SA after Johannesburg, due to continued unrest and poor service delivery in KZN.
As far as the repo rate is concerned, economists who have been hedging on a downward turn in interest rates for the last quarter of 2023, may yet be vindicated as headline consumer inflation has dropped to 4.7% in July, which is its lowest level since 2021 and significantly better than expectations.
So what does this mean for the commercial and industrial markets in SA? The commercial occupier market still seems to be tenant-driven. The national office vacancy rate stood at 18.7% in Q2 2023, up from 18.4% in Q1, and the highest office vacancy rate since Q4 2020. Conversely, the national industrial vacancy rate was 3.9% in Q2 2023, down from 4.1% in Q1, and promisingly, the lowest industrial vacancy rate since Q4 2021. The main driver of this declining vacancy rate is still the strong demand for industrial space from e-commerce and logistics companies.
Meanwhile, the national retail vacancy rate stood at 12.1% in Q2 2023, up from 11.8% in Q1, and the highest retail vacancy rate since Q4 2021. The main driver of the rising vacancy rate in retail is weak economic performance, which has led to lower consumer spending.
In the capital markets sector, there is a definitive lag between interest rate hikes and seller expectations on asking yields, causing a distortion on asking versus selling prices of up to 17% in some markets. Currently, we are seeing single-tenanted listed assets trading at well above 10%, and most investors still looking for additional upside versus vanilla (pure income/yield) acquisitions.
However, it’s not all gloom and doom as on average we see tenants increasing their space requirements on renewal, in addition, there is over R180 billion in commercial development projects taking place across the three major provinces.
As is often the case, when there is volatility in the market there is movement, and with that comes opportunity, which can be seen as Swindon has already concluded over 188 leases comprising a total of 142312 m2 and 71 sales totaling 201 174 m2 this year. With no signs of this trend slowing, we optimistically ride the property wave while we continue to endeavor to offer our clients the highest levels of professionalism and expertise.
Thank you for your continued support.
Sincerely,
Andrew Dewey