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SAPOA Valuation Report: Neighbourhood shopping centres’ cap rates worst affected

Notwithstanding higher bond yields, capitalisation rates have remained relatively stable over the past several years.

In the year to December 2023, the All-Property capitalisation rate exhibited a slight shift, settling at 8.3% by yearend despite an outward shift in both short-term and long-term bond yields.

Since 2000, the median South African All Property capitalisation rate maintained an average spread of 140 basis points over the 10-year bond yield. The All-Property capitalisation rate’s current premium to the risk-free rate suggests that commercial real estate may be expensive relative to a medium-term risk-free rate implying that there is less scope for meaningful yield compression to drive capital growth.

During 2023, the median All Property discount rate edged up 50 basis points to 13.8% mainly driven by an upward adjustment in valuers assumed forward market rental growth rate. It is also reflective of the higher risk expectation especially in the office sector.

Among the retail segments, neighbourhood shopping centres were the worst affected in their capitalisation rates, weakened by -10 basis points. This segment did, however, see a 14-basis point improvement in expected rental income growth. There were similar improvements in the outlook for rental growth across the other retail segments.

For more detailed information on SAPOA’s latest valuation report, download a free copy of the latest report here (free to SAPOA members only).

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