State of the South African property market

State of the South African property market

Private Property South Africa
Sarah-Jane Meyer

Rode’s Report on the South African Property Market for the second quarter of 2021 shows that industrial property is fundamentally still in the best position when compared with other non-residential property types. These categories suffer from oversupply, with the office market remaining the riskiest category.

According to the report:

-The national decentralised office vacancy rate neared 14% during the second quarter.

-National nominal rentals for decentralised A-grade space decreased by 6% year on year - declining for the fourth consecutive quarter.

-Office rentals dropped by 10% in Cape Town, by 7% in Johannesburg, and 5% in Pretoria, compared with the same period in 2020.

-The report concluded that no SA cities recorded rental growth rates above inflation during the period surveyed.

These findings are corroborated by the latest FNB Commercial Property Broker Survey - Second Quarter Market Activity Survey, which points to relative industrial market strength, with retail marginally better than the office market, which surveys’ respondents generally considered weak. This is attributed to ongoing planning by certain companies to scale back on office space.

Residential market

Rode’s report found that the housing market - which initially defied the odds during the Covid-19 pandemic - is starting to cool down.

Based on FNB data, house prices increased nationally by 4,1% year on year in May 2021. This is a slowdown from April’s 4,5% increase, and price growth failed to beat consumer inflation - now above 5,2% - for the first time this year.

“This is a sign that the demand induced by record low interest rates may have peaked,” says Kobus Lamprecht, Rode’s Report editor and head of research and publications at Rode & Associates.

“Looking at the trend for 2021 so far, house prices grew by 4,3% over the first five months compared to the same period in 2020. This implies that price growth for the year is still positive in real terms as inflation was 3,8%.

The cooling house prices are no surprise to us given the weak economy, which will no doubt take a further hit from restrictions to combat the third Covid-19 wave, as well as high and rising unemployment.

“The prospect of rising local interest rates from 2022/23 also does not bode well for house prices over the medium term,” says Lamprecht.

According to Rode’s residential survey data, flat vacancy rates dropped to 11,4% in the second quarter of 2021 – down from 12,1% in the first quarter of 2021.

However, Lamprecht says vacancy rates are well above the 5% average recorded in the three years - from 2017 to 2019 - that preceded the pandemic.

“This implies that they are high compared to historical levels. High vacancy rates have put enormous pressure on rentals, which will almost certainly continue in the short term as tenants remain under significant financial pressure,” he says.

Slight recovery

John Loos, Property Sector Strategist at FNB Commercial, says that none of the three major commercial property classes have yet seen their activity ratings return to pre-lockdown levels recorded in the first quarter of 2020 although, industrial property’s most recent rating is coming close.

“This relative situation remains in line with an economy whose level of output, as measured by Real GDP, is also not back up to pre-lockdown levels,” says Loos.

Lamprecht says the Rode’s Report for the second quarter of 2021 indicates that the property sector is busy recovering.

“However, we are without a doubt not yet out of the woods. This is due to the weak economy and because another Covid-19 wave hit South Africa in June. Besides, property fundamentals, such as vacancy rates and rentals, are generally still under significant pressure. This implies that it will not be plain sailing ahead.”

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