South Africa’s industrial property market continues to defy the odds with its low vacancies and strong rental growth with nominal rentals of industrial space booming in Cape Town. According to Rode & Associates’ State of the Property Market for Q1 2024, this figure was up by 20% compared to 2019, pre-pandemic.
One of the Rode’s survey respondents said there was a severe shortage of industrial buildings with rental wars because of multiple tenants looking to lease the same space. Another property broker said a tenant was secured after only one day of advertising without the said tenant even viewing the property.
Nominal gross market rentals in South Africa for industrial space of 500m2 grew by 4.8% during Q1 2024 compared to Q1 2023, up from the pace of roughly 4% recorded over 2023.
Rentals during Q1 2024 were up about 5% compared to the pre-pandemic levels of 2019. However, in real terms, rentals are still declining due to elevated building cost inflation.
Regionally, all the major conurbations shone with strong nominal rental growth (5% to 7%) and low vacancies. Logistics properties continue to have ultra-low vacancy rates.
In the Central Witwatersrand, nominal rental growth averaged 6% amid very low vacancies. One of Rode’s panellists noted that since Q4 2023 there has been a distinct sense that the industrial market is strengthening generally. It is no longer only logistics warehouses where landlords have leverage. Durban’s rental growth was also strong at 7%.
However, stand values did not perform as well as rentals.
The office market
Recovery of the office market in South Africa continued during Q1 2023 as evidenced by slowly growing nominal rentals and lower vacancy rates. Rode found that the average national vacancy rate of grades A+, A, and B space combined in decentralized nodes was 13.9% in Q1 2024 – one percentage point better than the 14.9% average in Q1 2023 (this is based on the opinion of property brokers active in nodes across the country.) Looking at the bigger picture, the current national vacancy rate is still well above the pre-Covid-19 level of 10.5% in 2019 and the historical long-term average of 9.3% as per SAPOA’s data.
Johannesburg and Pretoria are where vacancy rates are higher than the South African average with the coastal cities such as Cape Town and Durban performing comparatively better.
During Q1 2024, weighted gross market rentals for decentralized grade-A space increased nationally by 1% in nominal terms compared to Q1 2023. All in all, rentals have improved from the Covid-19 declines, but are still 2% below 2019 levels. The market has been boosted by the return of some workers to offices since 2022, albeit in many instances in a hybrid way. Cape Town has been the clear standout of the four major cities since 2022. Here, nominal decentralized grade-A gross rentals in Q1 2024 rose by 6.5% compared with four quarters earlier.
Rentals were about 10% higher than pre-Covid levels. However, this was not enough to outpace the building-construction inflation (BER BCI) of around 13%. Nominal rental growth in decentralized Durban grew at the second-fastest pace in Q1 2024 (+3.5%), while in Johannesburg nominal growth (+0.6%) managed to at least stay in positive territory. This implies that rentals declined sharply in real terms in all the major cities, which makes most new developments unviable. Office building activity in the 12 months to February 2024 declined by 43% compared to the 12 months to February 2023.
The residential property market
Nominal house price growth in South Africa is still slow amid a weak economy and elevated interest rates despite expectations of interest rate cuts having been dialled back. Another factor that has held back some buyers is uncertainty over the outcome of the South African elections.
Nominal house prices grew by 0.8% over January and February 2024 compared to the same period in 2023, based on FNB data. This implies that prices in real terms have continued to fall significantly as the average consumer inflation (CPI) rate was 5.4%.
Regionally, houses sold the quickest in the Western Cape in Q1 2024. Turning to Rode’s forecast, the group still expects South African nominal house prices in 2024 to grow at a slower rate than 2023’s average of 1.5% amid a weak economy and elevated interest rates.
At the time of the last Rode Report in December 2023, the market was optimistic that interest rates in the US and in South Africa would decline several times in 2024. So far, no cuts in the US and locally have occurred due to sticky inflation, with many forecasts being pushed back to late in the year.
Turning to apartments, vacancy rates on a national level edged down to 7.9% in Q1 2024 from 8.1% in Q4 2023, according to Rode’s residential survey data. Vacancy rates are still up from the average 2023 level of 7.2%.
Regionally, the Western Cape continues to stand out with its low apartment vacancy rate of 2.3% in Q1 2024, well below the national average. In contrast, vacancy rates in Gauteng and KwaZulu-Natal were much higher.
On a positive note, apartments were less empty in Johannesburg than at the end of 2023, while the trend was the opposite in Pretoria. Official data from Stats SA shows that during Q1 2024, nominal flat rentals in South Africa increased on average by 3.6% compared to a year earlier. But overall, house prices and rentals are still declining in real terms in most parts of the country.
