There have been winners and losers in South Africa’s broader property sector since the outbreak of Covid-19 in March last year.
No doubt one of the big winners has been the residential property market, that saw a surge in sales due to record low interest rates. Another winner is the industrial and/or logistics property arena.
Retail property, which was initially hard-hit by lockdowns, is seeing a recovery. But the office sector is facing tough times with record vacancies.
Kobus Lamprecht, head of research and publications at noted Cape Town-based property economists Rode & Associates, is my guest in this episode of The Property Pod.
We are taking a look at the latest Rode Report on the South African Property Market (Q3 2021), published earlier this month.
The report has been covering the broader local property market for years, including the office, industrial, retail, residential and more recently the listed property sector. It is quite comprehensive, with the latest edition being around 200 pages.
Highlights of the interview appear below. You can also listen to the full podcast above or download it from iono, Spotify or Apple Podcasts.
“There is quite a lot of research to digest, with trends differing between the different property types. But I think the general theme is that there is recovery taking place in most of the sectors.”
“Driving around Cape Town last week, there seemed to be a bit more optimism in the air. I don’t know if it’s the Springboks beating the All Blacks last weekend or just the Covid cases declining, or South Africa being taken off the red list from the UK – or just the economy picking up. There seems to be more optimism in the air.”
“Industrial property has been the sector that’s been proving very resilient during the pandemic, and it actually seems to be picking up [after the] vacancies in the first quarter of this year.”
“Vacancies are less than 5% now … That also supported rental growth, which has picked up about 3% year on year in the third quarter of this year.”
“It’s quite interesting that with industrial properties the hard manufacturing [sector] still is under severe pressure. And now with load shedding starting again, that’s going to put that sector under pressure. Manufacturing production, if we look at the data from Stats SA for the first seven months of the year, was up quite a bit from last year; but if you compare it to year 2015, it’s actually been lower than that.”
“The retail [property] sector has surprised quite a few people this year with recovery taking place that side, and also logistics shining – and that’s been helping the industrial property market to stage quite a good recovery.”
“On the worst end, the office sector is in a very bad stage at the moment.”
How sustainable is this recovery because it’s still in uncertain times?
“I think it started with the listed sector. Listed property prices [are] up about 20% this year, but if you look at the bigger picture, they were about 30% below February 2020 levels … So there’s still a lot of growth that can happen there, but as you correctly pointed out, there is still a lot of uncertainty.”
“It will be a bumpy road with ups and downs, and there’s still uncertainty about Covid.”
“Will we have a fourth wave, will there be a fifth wave? I think the big risk is if there are more virus mutations like we’ve seen with the Delta variant. The economy’s not back to 2019 levels yet, although it has recovered quite well this year and surprised many analysts.”
“But if you look at the long-term outlook for the listed property sector, I would say it’s still good, there’s still a lot of value in the listed market because a lot of the companies are trading well below their net asset values – like 20 to 30%.”
“However, if you look at some companies like Equites, for example, which is a logistics-focused Reit [real estate investment trust], its share price was about the best in two years this week, and it’s trading far above its net asset value. That is a company that’s already doing very well.”
“Some are still lagging behind, but I think we need to be careful [about] what exposure these companies have. If they have a lot of office exposure, it could be more risky … With retail there could also be a very bumpy recovery phase, especially if we have more lockdown restrictions and things like that.”
“So yeah, it’s going to be a bumpy recovery … The downcycle could last a few more years when you look at the office market.”
The Rode Report talks about the work-from-home trend possibly being a little exaggerated. Will the office property market still be important?
“There will always be room for offices; I think just a bit less than there used to be.”
“Humans need face-to-face interaction to build company culture and morale. But I think for sure the days of working five days a week at the office have gone, and it’s probably going to end up with a flexible approach – like working three days a week at the office – that could become the norm.”
“But for the large corporates, I would say there will definitely still be quite a large need to have office space, especially if you want to hold meetings. It’s very difficult, if you look at ‘Zoom fatigue’ taking place – I hear that more and more.”
“So for the large corporates I think the offices will be more important. For the smaller companies, such as in our own company, most are working at home and it’s quite easy.”
“I think the big point is that when Covid started everybody was [predicting] the office sector would never make a comeback. That’s probably exaggerated. I think it’s not going to be that. It’s going to take a few years to recover, but at the moment it’s looking very bad and probably will still be for the next year or two.”
“The [office property] oversupply is very significant and vacancy rates nationally for decentralised space, for grade A and B combined, are at about 14% to 15% now. The vacancy rates will probably go up to 20% or even 25% in the next year as leases expire and tenants take less space.”
“We have a forecast currently that the market will probably bottom out in 2023; and then from 2024 the vacancy rate could start to improve. That’s considering that economic growth will pick up and higher business confidence will encourage companies to expand and new companies to start. So, it’s very much dependent on the economic outlook.”
“I also think an important point for the long-term outlook for the sector is that not a lot of offices are being constructed currently. There are also conversions that are going to take place … But it’s something that happens slowly, so this is something that’s going to play out over the long term.”
“I think an important point also regarding property is it’s not something like a consumer product that you can easily mop up or eat up like apples.”
We hear about the record office vacancies in Sandton – but what about Cape Town and Durban?
“The Durban CBD has been struggling – even before Covid came along – and we didn’t receive data this quarter in terms of vacancy rates for the Durban CBD. But I looked at Sapoa’s [SA Property Owners Association] reports, and the average vacancy was 26% for grade A and B space.”
“That’s higher than all the other CBDs. So, [Durban] is under significant pressure. The CBDs in general I would say are under pressure. Johannesburg as well.”
“The Cape Town CBD historically is the one that’s done a lot better than the others; but since the pandemic it has seen a sharp increase in its vacancy rates – almost at 20%.”
“It was 11% just before the pandemic started. But actually, most of Cape Town is under pressure. I don’t think it’s the CBD only.”
“The general theme has been office companies cancelling their leases and taking up less space. In the office market, our survey shows that office rentals are down about 6% for the third quarter … I think if you consider some of the steep discounts that we’ve been hearing of from the brokers and from the Reits, the rental reversion rates have been more than 20% for some companies.”
What are your thoughts on the residential property market and increasing expectations of interest-rate hikes?
“There has been quite a solid performance by the housing market because of the low interest rates [we’ve] had since the pandemic.”
“But let’s just stand back a bit. Remember last year, when we had the hard lockdowns, we saw the Deeds Office close because of Covid cases; there were a lot of delays in processing transactions.”
“Then we had that big bounce in the second-half of last year, and that’s really when the market was very hot … Since then, it’s been cooling and cooling, although the house prices are still growing …”
“[House price growth] is less than inflation, but it’s still holding up quite well. However, I think the big test will come now, when interest rates start to increase …”
“A lot of countries have started to lift their interest rates, like South Korea. Brazil has done it two times already, and they’ve got very high inflation, while New Zealand lifted their interest rates last week… Everybody is watching America. They might also increase interest rates next year.”
“If all of these countries lift interest rates we also need to need to increase our interest rates to attract that much-needed capital. I think the big thing is that it’s getting closer and, if you want to buy a property, you need to consider that, because if we see quite a few interest-rate hikes, there’s going to be pressure on paying back the mortgages.”
“It depends on how far the interest rates increase. The baseline scenario from Rode is that rates could go up to about 8-9% over the next few years.”
“Inflation is one of the topics internationally now because of all the shortages taking place because of Covid. So that’s definitely something to watch out for.”