Operating conditions remain tough for property companies in South Africa due to the impact of load shedding, fast-rising operating costs, subdued economic growth and elevated interest rates and it is no surprise that dividends are not back at pre-Covid levels, while debt levels are worryingly on the rise for some.
In such an environment, asset sales continue to occur which has the effect of pushing up capitalisation rates of directly held properties – holding all other factors constant.
Above-average vacancies and subdued rental growth are still prevalent in the office and retail segments according to Rode’s State of South Africa’s Property Market Q4 2023, which implies that it will take a few years for the property sector to recover fully and dividends to reach pre-Covid levels.
The industrial property market is still performing comparatively better. Encouragingly, share prices of many listed property funds bounced back in November and December 2023 as the market is hopeful that one of the challenges of the sector, namely high interest rates, will be less of a factor in the coming years. However, the ratings of REITs are still poor, but somewhat better than a quarter ago.
Office
The office market had a better 2023 but remains in the worst position of the three major commercial property types. Encouragingly, vacancies improved in 2023, while the nominal market rental data surveyed by Rode indicates a continued recovery from the low Covid levels.
Rentals in real terms continue to look bleak. Rode found that the average vacancy rate of grades A+, A and B space combined in decentralized nodes in South Africa was 14.4% in Q4 2023, better than the 15.2% average in Q4 2022. (Decentralized means all nodes in a metro lumped together, excluding the (old) CBD).
Looking at the bigger picture, the current national vacancy rate is still well above the pre-Covid level of 10.5% in 2019 and the long-term average of 9.3%, as per SAPOA’s data. In Q4 2023, weighted gross market rentals for decentralized grade-A space increased nationally by a measly 1.5% in nominal terms compared to Q4 2022, slowing from 2.8% in Q3 2023. For the calendar year 2023, rental growth averaged 2.4%, which was faster than the 1.2% growth in 2022. All in all, rentals have improved from the big Covid declines, but are still not yet at 2019 levels.
Since 2022, Cape Town has been the clear standout of the four major cities. Here, nominal decentralized grade-A gross rentals rose by 6% year-on-year in Q4 2023, ending the year 5% higher than pre-Covid levels. For the full 2023, market rentals rose by 10%, thereby outpacing building-cost inflation (BER BCI) – the only major city to do so. Nominal rental growth in the decentralized nodes of Johannesburg, Durban and Pretoria averaged between 0% and 2% in Q4 2023 − all below building cost inflation.
Industrial
Results of Rode’s Q4 2023 survey show that of the three major commercial property types, the industrial property market is still best placed due to its low vacancy rates, resulting in satisfactory rental growth. Nominal gross market rentals for space of 500m2 grew by 4% in Q4 2023 compared to Q4 2022, in line with the growth recorded in the third quarter. Rentals at the end of 2023 were up about 15% compared to the pre-pandemic levels of 2019. Overall, rentals grew by 4.1% in 2023, slightly slower than in 2022. Interestingly, rentals of industrial space of 1 000m2 grew at a slightly faster rate of 5% in 2023.
Regionally, growth was the strongest in Cape Town. However, in real terms, rentals in all major conurbations are still declining due to elevated building-cost inflation. This was to be expected, given weaker economic growth and due to the pressure on the manufacturing and retail sectors.
The resilience of the industrial property market is particularly evident in its low vacancy rate. However, there is a risk of higher vacancies and lower rental growth in the short term, given the sustained level of low business confidence.
Residential
The housing market continues to slow down due to lower effective demand for property because of the weak economy, the high cost of living and elevated interest rates. Nominal house prices grew by only 0.5% in November 2023 compared to November 2022, based on FNB data.
This took house price growth to 1.6% in the first eleven months of 2023, well below the 3.5% growth achieved in calendar year 2022. In real terms, house prices fell by about 4% in the first eleven months of 2023, after deducting the consumer inflation (CPI) rate of 6%.
Rode expects nominal house prices to stagnate in 2024 with zero expectation of real price growth soon. It is all about affordability. Rode has noted that the market’s interest rate expectations for 2024 have turned more favourable since the previous Rode Report and if the market is correct, this could boost house prices, starting later in 2024 and during 2025. But as warned often before, interest rate forecasts can change quickly.
Turning to apartments, vacancy rates on a national level lifted to 8.1% in Q4 2023 from 6.9% in Q3 2023, according to Rode’s residential survey data. Overall, vacancy rates averaged 7.2% in 2023, down from 8.3% in 2022.
Regionally, the Western Cape continues to stand out with its low flat vacancy rate of 2.8% in Q4 2023, well below the national average. The decline in national vacancy rates since its Covid peak has supported rental growth.
Official data from Stats SA shows that during Q3 2023, nominal apartment rentals in South Africa increased by 2.5% compared to a year earlier. PayProp data shows that the nominal rental growth rate for housing lifted to an even higher 4.6% in the same quarter − the fastest growth rate since Q4 2017. Overall, house prices and rentals are still declining in real terms in most parts of the country.
