News Research

The State of SA’s Property Market Q1 2023

SA house prices (in real terms) are deflating according to Rode’s State of the Property Market Report for Q1 2023. This is being caused by the sharp rise in the prime interest rate to 11.25% by the end of March 2023 from 7% in October 2021, as well as a declining economy.

This comes after the mini boom during the pandemic when prices were lifted by the sharp interest rate drop at the time. Numerous homebuyers have been caught off guard by the extent of the interest rate hikes despite warnings by many that these would eventually have to rise.

A positive for the property market is that the top of the current upward cycle of interest rates is close, with interest rates likely to move lower towards the end of 2023 or in 2024.

A wild card is the impact of the surge in the oil price at the beginning of April and the eventual outcome of the Putin war. Apart from higher interest rates, the huge electricity crisis is also top of mind of property companies and tenants. The cost to keep properties running during load shedding is enormous and not all costs can be recovered from tenants which will negatively impact the earnings and ultimately dividends declared by REITs. This also adds to the tenants’ cost of occupancy which eventually reduces their ability to absorb rental hikes.

The property sector also faces numerous other challenges including high vacancies, rising operating costs and a lack of municipal service delivery as well as the local and global economies, which face a period of low growth.

Encouragingly, the recent financial results for the period ended December generally did look better, especially for REITs exposed to the retail and industrial sectors. The oversupplied office market remains a ‘drag’ on the results of REITs and other funds that are heavily exposed to this sector.

The office market remains challenging due to its significant oversupply. However, Rode data shows that vacancy rates have moved lower from higher levels, while nominal market rental growth has also picked up from a low base.

That said, REITs are still generally reporting large negative rental reversion rates as rentals have escalated by much more than market rentals. The outlook for this market is clouded by a poor economic outlook and the remote working trend, with hybrid working models proving popular. The electricity crisis has worsened prospects for the economy – and office demand. Nationally, weighted gross market rentals for decentralized grade-A space rose by 3.2% in nominal terms during Q1 2023 compared to the first quarter of 2022. This shows that rentals have bottomed out after falling by 5.2% in 2021 and by 1.2% in 2020.

For some perspective, the first quarter national nominal rental rate was still 3% below 2019 levels (pre-pandemic). In real terms, rentals are still in negative territory after deducting the BER’s rough 6% estimate of building cost inflation. The positive is that the cooling of building cost inflation will generally result in a smaller decline in real rentals than that seen in 2022.

Regionally, Cape Town has been the clear top performer over the past few quarters. During Q1 2023, grade-A nominal rentals increased by 13% in Cape Town decentralised compared to Q1 2022. Decentralised rentals rose by 2.3% in Johannesburg and by 1.7% in Pretoria. Durban took a turn for the worse, with decentralised rentals down 2.3%. It is important to understand that these increases are year-on-year, meaning that the Q1 2023 level is compared to the low level of Q1 2022. In real terms, only Cape Town managed to record above inflation rental growth compared to a year ago. The Mother City’s rentals now also exceed the average 2019 level.

Rode’s Q1 2023 survey results show that the industrial property market is still the best placed of the three commercial property sectors thanks to its superior rental growth and low vacancy rates. However, there are signs that the market is starting to slow, such as a weaker cap rate and slower rental growth which is not surprising given the state of the economy and the resultant hits to the manufacturing and retail sectors.

Nominal gross market rentals for space of 500m2 during Q1 2023 grew by 5.1% compared to Q1 2022. This is slower than the 5.7% growth recorded in Q4 2022. In real terms, rentals are still declining but only slightly as building cost inflation (BER BCI) was estimated to have cooled to about 6%. The industrial market has been boosted by continued low vacancies, but it is puzzling that vacancy rates have not worsened given the poor economic environment – perhaps landlords have kept vacancy rates low at the expense of rental levels as reversion rates on new leases have been negative for most REITs. Vacancy rates are low, especially for warehoused linked to logistics, thanks to strong online sales.

Regionally, the East Rand surprised on the upside, with rental growth of 7.4% compared to Q1 2022. The East Rand struggled during the pandemic with nominal rental growth of only 1% in 2020 and 2021, which implies that it is playing catch-up. Nominal rental growth in Cape Town and the Central Witwatersrand was also relatively strong at about 5%, while growth was slightly slower at 3.5% in Durban.

The housing market continues to slow down 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 2.5% in the first two months of 2023 compared to the same period in 2022 based on FNB data. This indicates a slowdown after growth of 4.2% in 2022 and 3.5% in 2021. In real terms, house prices are still declining sharply, after deducting the consumer inflation (CPI) rate of close to 7%. Turning to apartments, vacancy rates on a national level averaged 6.8% in Q1 2023, unchanged from Q4 2022, according to Rode’s residential survey data. 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 that preceded the pandemic.

On a regional level, the Western Cape continues to stand out with its low flat vacancy rate of 2%, down further from 3.2% in Q4 2022 and well below the national average. In contrast, Gauteng (apartments in Johannesburg and Pretoria) saw its vacancy rate worsen to 10.1% from 8.2%. KwaZulu-Natal’s vacancy rate also worsened to 14% from 10.8%. All in all, house prices and rentals are still declining in real terms in most parts of the country.