The property market continued to recover during the third quarter of 2021 according to the latest issue of Rode’s Report on the South African Property Market.
This was indicated by the further increase in listed property prices, boosted by higher global economic growth and better-than-expected company results.
Listed property prices at the end of September 2021 were 20% higher than at the end of 2020. However, looking at the bigger picture, prices were still 10% below those at the end of February 2020, just before Covid-19 emerged in South Africa, implying that the sector is still recovering, but it has a long way to go before it reached pre-pandemic levels.
The move to Covid-19 lockdown level 1 at the end of September was a welcome boost for the economy and the property market, which, according to Rode & Associates, will no doubt support recovery. However, South Africa is not out of the woods yet due to a possible fourth wave closer to the end of 2021, given that only about 21% of the population have received a first vaccine dose so far. Worryingly, only 15% have been fully vaccinated, implying that it will be a bumpy road ahead.
Fundamentally, industrial property remains best positioned compared to the other commercial property types. The retail market recovered well while the office market remains significantly oversupplied and as a result, the riskiest.
The office market
Just when it seemed that more workers would return to the office, the third Covid-19 wave came along in June. Another wave closer to the end of 2021 means that office property owners are bracing themselves for even tougher times over the short-term as many employees will continue to work from home. That said, the impact of the work-from-home trend over the long-term, is probably overstated as working completely from home will not work for many companies, especially large corporates, as humans require face-to-face interaction to build company culture and morale. This means a flexible or hybrid approach will likely become the norm i.e., working three days a week at an office, if required.
The results of Rode’s second office vacancy survey continues to point to a high and rising amount of empty office space with the national decentralized vacancy factor (for A-grade and B-grade combined) standing at 4.2 points during 2021’s Q3. This equates to an average vacancy rate of approximately 14% – the highest recorded this century.
Several REITs, like Growthpoint Properties (20%), have reported even higher vacancy rates this year, suggesting that the national figure could rise even further. This large and growing amount of available space means that tenants are spoilt for choice and clinching ‘eye popping’ deals.
Rode’s latest office market survey shows the national gross market rentals for decentralized A-grade space decreased by 6% year-on-year (y/y) in nominal terms during 2021’s Q3, declining for the fifth consecutive quarter.
Rentals are down even more if some of the steep concessions are considered during 2021’s Q3 and A-grade nominal market rentals decreased by 11% in Cape Town and 6% in Johannesburg, compared to 2020’s Q3 – the worst declines of the major cities.
Rentals declined by 5% in Pretoria, implying that none of the major cities managed to record above-inflation rental growth.
The industrial property market continues to recover, with gross market rentals in 2021’s Q3 growing by 2.6% y/y amid continued low vacancies, according to Rode’s industrial survey data.
This means that growth has picked up from the approximate 1% achieved during the first half of 2021. However, rental growth is still well below the 5% of 2019.
The sector is now comfortably the best placed of the major commercial property sectors with one of the key reasons for the outperformance of industrial property largely non-speculative nature of developments.
Rentals for prime industrial space of 500m2 grew by about 2% in Durban, Central Witwatersrand, and the East Rand. In these conurbations, vacancies declined during the first 9 months of 2021 compared to 2020 and they are generally still quite low (less than 5%).
The story of the quarter is Cape Town, where nominal rentals rebounded to grow by 3.7% compared to 2020’s Q3, after falling for four consecutive quarters. This is surprising as the Mother City’s vacancy factor has stayed above level 3 on the Rode scale of 1 – 9 (higher than 5%) since 2020’s Q3.
Capitalization rates in Cape Town also declined during Q3, which means that property brokers are perceiving this sector in a more positive light.
The housing market, which defied the odds during the pandemic, continues to cool. Nationally, nominal house prices increased by 3% y/y in September 2021, slowing gradually from the pandemic peak of 5.1% in April 2021, according to FNB data.
Looking at the trend for 2021 so far, prices grew by 4.3% over the 9 months compared to the same period in 2020 – on par with consumer inflation.
The cooling house prices do not come as surprise, given the record-high unemployment and that the economy, albeit recovering, has not reached pre-pandemic levels yet and it will probably only do so in 2020 or 2023 due to the extent of the damage caused by the pandemic and government policies over many years. The impact of the third-wave restrictions and severe riots in July has also been a further setback.
The prospects of higher local interest rates are looming large as several countries, like South Korea and Brazil, have started to increase rates due to higher inflation.
Faster increases in inflation are becoming a global problem in the wake of accommodative monetary policies and shortages of several products and commodities due to supply-chain disruptions caused by the pandemic.
Hikes in global interest rates will force South Africa to follow suit with the worldwide normalisation of interest rates having serious implications for inflated asset prices – globally.
Flat vacancy rates in South Africa declined further to 10.2% during 2021’s Q3, after hitting a peak of 13.1% during 2020’s Q4, according to Rode’s residential survey data.
However, vacancy rates are well above the 5.3% average recorded in the 3 years (2017 to 2019) that preceded the pandemic, implying that they are high compared to historical levels.