The quarterly Rode Report covers the movements of several critical property variables, ranging from capitalisation rates, market rentals, operating costs, vacancies, escalation rates and land values to house prices.
The 2021 third quarter report indicates that industrial property remains in the best position compared to the other non-residential property categories, like retail and offices. The housing market is cooling but has held up reasonably well due to the ongoing record-low interest rates.
Interest rate hikes
However, the report warns of coming higher interest rates, which will have serious implications for inflated asset prices – not just in South Africa but globally.
“The prospect of rising local interest rates from 2022/2023 onwards does not bode well for house prices over the medium term,” says property economist Erwin Rode.
“We believe the upcycle in global interest rates has already begun.”
Rode refers to South Korea and Brazil, where interest rates have already been hiked, fuelled by faster increases in inflation in the wake of accommodative monetary policies, supply-chain disruptions and the resultant shortages of several products.
He also believes the Federal Reserve in the USA will start to increase rates by late 2022 or early 2023.
“This means the start of an upward interest rate cycle in South Africa cannot be far away. Therefore, we would all be wise to brace ourselves to meet these future interest rate hikes.”
Despite these looming possible negatives, the report shows that the SA property market continued to recover in the third quarter of 2021.
Some of the positive signs include a further increase in listed property prices. At the end of the third quarter, these were 20% higher than at the end of 2020.
However, prices were still 10% below those for the end of February 2020, just before the first Covid-19 hard lockdown. Also, no one knows yet what effect the expected fourth wave of the pandemic at the end of 2021 may have, particularly as the vaccine roll-out is slower than hoped for.
Because of these factors, Rode believes the office market will need to keep coping with tougher times over the short term, as many office workers continue to work from home. However, he also believes the work-from-home (WFH) trend over the long term is probably overstated.
“Working from home just doesn’t work for a lot of organisations - particularly large corporates. People need face-to-face interaction to build company culture and morale. So, the probability is that a more practical hybrid model will evolve, with workers dividing their time between the office and working from home.”
Nevertheless, the office market vacancy rate reported during the third quarter of 2021 was the highest so far this century, with an average of 14% across the country.
- The worst reported grade-A office rental declines were in Cape Town decentralised (11%) and Johannesburg (6%).
- Office rentals also declined by 5% in Pretoria.
- No major SA city managed to record above-inflation rental growth in this quarter.
The report indicates that industrial property is currently in the strongest position compared to other non-residential property types - and even retail is beginning to recover.
“The industrial sector is now comfortably the best-performing non-residential sector, largely due to the non-speculative nature of developments,” says Rode.
“Although rental growth was still well below the 5% of 2019, the third quarter at least showed a 2,6% year on year growth for industrial property, accompanied by low vacancies.
“A real surprise was Cape Town, where nominal rental rates had rebounded with a growth of 3,7% compared to the third quarter of 2020 and after falling for four consecutive quarters.”
A cooling down period has begun for the residential market, following the pandemic-spurred renewed interest in home ownership when interest rates dropped to record lows.
The report shows that from a mid-pandemic peak of 5,1% year on year growth in April 2021, national nominal house price growth stood at 3,5% year on year over the last quarter.
“This is no surprise,” says Rode. “Unemployment figures are at an all-time high. In addition, there was the impact of third-wave restrictions and the severe riots in July. So the fact that this market is now experiencing a setback is completely understandable.”
Flat vacancy rates dropped to 10,2% in the third quarter after hitting a peak of 13,1% in the fourth quarter of 2020. However, vacancies are still high compared to historical levels, leaving flat rentals and landlords under enormous pressure.
“These are strange times, and although economic forecasts at the best of times are speculative, we now find ourselves in completely uncharted waters,” says Rode.
“The best course would be to tighten our belts and ride out the rest of the storm.”