Tough times for property in South Africa

The commercial property market is still expected to grow in 2023 – but at a far slower rate than in 2022, as rising interest rates have started to feed into the wider economy.

This is according to FNB Proproperty Strategist John Loos, who noted that sales activity for commercial properties had declined this year after peaking in 2022.

In the latest FNB Commercial Property Broker Survey for the first quarter of 2023, all 3 major property classes (Office, Retail and Industrial) saw broker perceptions of slightly lower sales activity compared to the prior quarter, and in two of the three classes (Office and Retail) lower than the 1st quarter of a year ago.

Adding pressure to the market, the value of commercial mortgage loans granted has recorded significant declines, with the fourth quarter of 2022 showing a year-on-year decline of 5.67%, Loos said.

FNB expects that 2023 will see a weaker reading than the two years prior in terms of all property total returns.

According to Loos, the commercial property sector is likely to show the following markers:

• All property growth is forecast to return to negative territory in 2023 after a small positive +0.8% growth rate in 2022.
• The overall vacancy rate is forecast to rise mildly this year, following two prior years of small declines – thus remaining elevated.
• These will likely cause net operating income growth to slow from its 6.6% rate recorded in 2022.

FNB’s determinations into the commercial property space are based on Loos’ belief that interest rates have likely peaked after 425 basis points worth of increases since late-2021 and will move sideways through the rest of 2023.

Loos said that despite the interest rate cycle probably ending, the full impact of recent rate hikes is still feeding through to the economy, and slower growth is expected in 2023 – with a weaker property market performance expected.

Other analysts and economists are less optimistic about the end of the rate-hike cycle, and anticipate another 25 basis point hike in May.

FNB’s forecast for the economic standings of the country has remained unchanged since the start of the year.

“We remain of the opinion that 2023 will prove to be a slower commercial property year, despite the FNB forecast that interest rates have reached their peak,” said Loos.

“Prime rate reached 11.25% following the SARB’s most recent repo rate hike in March 2023. FNB believes that this represents the peak in the current interest rate hiking cycle, with the prime rate expected to move sideways at the current level until well into 2024,” said Loos.

The graph below illustrates the national property sales activity rating by sector:

Oversupply

On top of the commercial property market slowing down, the sector is also facing issues on the demand side, with an oversupply of office space and not enough tenants to fill them.

Redefine Properties Ltd., South Africa’s second-largest real estate investment trust, said an oversupply of offices has kept rents under pressure.

The company’s profit plunged 63% to R798.5 million in the six months ended Feb. 28. Rising interest rates and unprecedented power outages prompted the company to lower its earnings per share forecast for the year to as low as 48 cents per share from 54 cents a share, according to Chief Financial Officer Ntobeko Nyawo.

“The downgrade in guidance is mainly due to more punitive refinancing rates than initially envisaged,” Pranita Daya and Mweisho Nene, analysts at SBG Securities Ltd. said in a note to clients. “Diesel costs have detracted 1.5% from” first-half earnings, they said.

Africa’s most-developed nation is reeling under an energy crisis. The nation’s central bank forecasts the outages will shave off two percentage points of growth this year. Incessant blackouts because the state-power utility’s failure to generate enough electricity is forcing companies to buy diesel to run generators, increasing costs.

Redefine’s shares fell as much as 6% on Monday, the biggest intraday drop since Dec. 1.

Rentals for the company including in Johannesburg’s Sandton — dubbed as the richest square mile in Africa — and Cape Town average R182 a square meter, Leon Kok, Redefine’s chief operating officer, said in an email response to questions.

“We will only see net new growth in demand once we experience sustained economic growth of 3% and above and unemployment levels improving,” he said. “As long as we have a general over supply of space, rental growth will be very limited.”

Net group interest costs increased 31.5%, mainly driven by the consolidation of EPP NV, its Polish unit, Redefine said in an exchange filing.

In South Africa, Redefine’s active portfolio vacancy rate increased to 7.5% in the period, from 6.7% in the year ended Aug. 31.

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Tough times for property in South Africa