South Africa’s industrial property market remains the best placed of the major commercial property types. However, according to Rode’s State of the Property Market for Q2 2023, signs of slowing down include weaker rental and stand value growth.
Rode Report editor, Kobus Lamprecht, says this was to be expected, given the state of the economy and the pressure on the manufacturing and retail sectors, with the electricity crisis a large negative factor.
“The retail property market made a strong comeback in 2022, but it has also been under pressure of late. This is demonstrated by the weaker retail sales performance and higher mall vacancy rates, which are reflected in the higher capitalisation rates of regional shopping centres.
“The office property market remains the worst placed of the three, but there is some improvement with vacancies declining.
“House prices have come under renewed pressure, whereas apartment rentals are tending towards the opposite.”
Industrial
The results of Rode’s survey for the second quarter of 2023 show that the industrial property market is still the best-placed commercial property type because of its relatively higher rental growth and low vacancy rates.
However, weaker rental and stand value growth and lower building activity show that this market is starting to slow down. Nominal gross industrial market rentals for space of 500m2 increased by 4.1% in the second quarter of 2023 compared to the same period in 2022. This is slower than the 5.1% year-on-year growth recorded in the first quarter of 2023 and was the second consecutive quarter of weaker growth.
In real terms, rentals are still declining after deducting building-cost inflation. Regionally, nominal rental growth was the strongest in Cape Town at 7% and the East Rand at 6%. In both these areas, vacancy rates improved in the first half of 2023 to 2 points on Rode’s scale - from 1 to 9 - or 3.4%.
In fact, most SA metropoles have experienced lower vacancy rates compared to the first half of 2022, averaging less than 5%. The exceptions were Bloemfontein and Gqeberha, where vacancy rates average 6% to 7%. Nominal rental growth was slower in the Central Witwatersrand at 3.2% and in Durban at 2.2%.
Lamprecht says it is surprising that industrial vacancy rates remain low - and even declined further during the second quarter of 2023 to an average of 3.9% nationally.
“Perhaps landlords have kept vacancy rates low at the expense of rentals as reversion rates on new leases have been negative for most Real Estate Investment Trusts (REITs).
“Contractual rentals have escalated by more than market rentals. It could also be that landlords have decided to be lenient with tenants, who have had to find additional funds for power, such as diesel for generators. In June, Growthpoint, the largest SA REIT, reported that load shedding severely affects manufacturing and production tenants, raising their costs, straining occupancy affordability and contributing to more tenant failures.”
Rode believes that rising vacancy rates could start to show in the coming quarters.
Office
Due to its significant oversupply, the office market remains in the worst position of the three major commercial property types. However, Rode’s data for the second quarter of 2023 continues to point to an improvement in vacancy rates while nominal market rental growth remains positive.
REITs are still generally reporting large negative office rental reversions as contractual rentals have escalated by much more than the growth in market rentals. The poor economy and the remote working trend also cloud the outlook for the office market. However, the momentum seems to be shifting towards returning to the office in larger numbers.
Overall, hybrid working policies - for example, three days a week in the office - remain the popular choice. This means less demand for office space compared to pre-Covid-19 levels.
In real terms, only Cape Town recorded above-inflation rental growth compared to the same period in 2022. Durban decentralised rentals fell by 1.1% − the second consecutive quarterly year-on-year decline - but some nodes like La Lucia Ridge and Umhlanga still performed well.
The results of Rode’s office vacancy survey show that vacancy rates throughout the country improved further during the second quarter of 2023, with the average vacancy rate of grades A+, A and B space combined 14.5% in this quarter - lower than the 14.9% in the first quarter. This is chiefly because of less vacant space in Cape Town and, to a lesser extent, in Johannesburg.
Residential
The report shows that the housing market continues to slow down. This is due to lower effective demand for property as a result of the weakening economy, the higher cost of living and rising interest rates.
Nominal prices grew by 1.9% in May 2023 compared to May 2022 - the slowest growth rate since July 2020 - based on FNB data. Prices increased by 2.3% in the first five months of 2023 compared to the same period in 2022. This indicates a slowdown from mini-boom levels during the pandemic when the prime interest rate fell as low as 7%.
In real terms, house prices fell sharply in the first five months of 2023, taking into account the consumer inflation (CPI) rate of 6.8%. Interest rate hikes started affecting prices and sales activity more materially in the second quarter of 2023, especially in Gauteng. More sales have also taken place as a result of owners experiencing increased financial pressure. Lamprecht says the impact of this is not yet over.
According to Rode’s residential survey data, flat vacancy rates averaged 6.9% nationally in the second quarter of 2023, the same as in the first quarter. This is better than the 8.3% average of 2022. However, vacancy rates are still slightly above the 5.3% average recorded in the three years from 2017 to 2019 before the Covid 19 pandemic.
“The improvement in national vacancy rates since 2021 has supported rental growth for flats,” says Lamprecht.
Official data from Stats SA shows that nominal flat rentals in South Africa in the first quarter of 2023 increased by 2% compared to 2022, in line with the 1.9% growth in the fourth quarter. PayProp data shows that nominal rental growth lifted to an even higher 4.2% in the first quarter of 2023 − the fastest growth since the fourth quarter of 2017.
However, reduced affordability is negatively affecting apartment sales, with several brokers reporting a quiet market.
All in all, house prices and rentals are still declining in real terms in most parts of South Africa.
Writer: Sarah-Jane Meyer