There have been winners and losers in the broader South African real estate sector since the Covid-19 outbreak in March last year.
Without a doubt, one of the big winners has been the residential real estate market, which saw an increase in sales due to historically low interest rates. Another winner is the area of industrial property and / or logistics.
Retail property, which was initially hit hard by the closures, is experiencing a recovery. But the office sector faces tough times with record vacancies.
Kobus Lamprecht, Head of Research and Publications for Cape Town’s leading real estate economists Rode & Associates, is my guest on this episode of The Property Pod.
We are taking a look at the latest Rode Report on the South African Real Estate Market (Q3 2021), released earlier this month.
The report has been covering the broader local real estate market for years, including office, industrial, retail, residential, and most recently listed real estate. It is quite comprehensive, with the latest edition of around 200 pages.
The 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 a lot of research to take in, with trends that differ between different types of properties. But I think the general theme is that a recovery is taking place in most sectors. ”
“Driving through Cape Town last week, there seemed to be a bit more optimism in the air. I don’t know if the Springboks beat the All Blacks last weekend or just the Covid cases declined, or if South Africa was removed from the UK red list, or the economy just rebounded. There seems to be more optimism in the air. ”
“Industrial property has been the sector that has proven to be very resilient during the pandemic and, in fact, it seems to be rebounding [after the] vacancies in the first quarter of this year ”.
“Vacancies are less than 5% now … That also supported rental growth, which has recovered about 3% year-on-year in the third quarter of this year.”
“It is quite interesting that, with industrial properties, hard manufacturing [sector] it is still under heavy pressure. And now, with the start of reducing loads, that is going to put that sector under pressure. Manufacturing production, if we look at the data from Stats SA during the first seven months of the year, increased considerably compared to last year; but if you compare it to 2015, it was actually lower than that. ”
“Retail trade [property] The sector has surprised many people this year with the recovery that is taking place on that side, and also the logistics shining, and that has helped the industrial property market to achieve a fairly good recovery ”.
“At worst, the office industry is in a very bad stage right now.”
How sustainable is this recovery because it is still in uncertain times?
“I think it started with the listed sector. Listed property prices [are] they were up about 20% this year, but if you look at the big picture, they were about 30% below February 2020 levels … So there is 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 is 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 have seen with the Delta variant. The economy has not yet returned to the levels of 2019, although it has recovered quite well this year and has surprised many analysts. ”
“But if you look at the long-term outlook for listed real estate, I’d say it’s still good, there’s still a lot of value in the listed market because many of the companies are trading well below their net asset values, like 20 to 30% “.
“However, if we look at some companies like Equites, for example, which is a Reit focused on logistics [real estate investment trust], its share price was the best in two years this week, and it is trading well above its net asset value. This is a company that is already doing very well ”.
Read: Equites remains bullish, with R4.2bn in offers on the cards
“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 riskier … 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 will be a bumpy recovery … The downward cycle could last a few more years if you look at the office market.”
The Rode Report talks about the work-from-home trend possibly being a bit of a stretch. Will the office real estate market continue to be important?
“There will always be office space; I think just a little less than there used to be. ”
“Human beings need face-to-face interaction to build company culture and morale. But I think the days of working five days a week at the office are gone, and you’ll probably end up with a flexible approach, like working three days a week at the office, which could become the norm. ”
“But for large corporations, I would say that there will definitely be a great need for office space, especially if you want to hold meetings. It’s very difficult, if you look at the ‘zoom fatigue’ that’s happening, I hear it more and more. ”
“So for large corporations, I think offices will be more important. For smaller businesses, like our own company, most work from home and it’s pretty easy. ”
“I think the big point is that when Covid started everyone was [predicting] the office sector would never return. It’s probably over the top. I think it’s not going to be that. It’s going to take a few years to recover, but right now it looks very bad and probably still will be for the next two years. ”
“The [office property] the oversupply is very significant and the vacancy rates nationwide for decentralized space, for grades A and B combined, are between 14% and 15% now. Vacancy rates will likely climb to 20% or even 25% in the next year as leases expire and tenants take up less space. ”
“We currently have a forecast that the market will likely bottom out in 2023; And then, starting in 2024, the vacancy rate could start to improve. That’s considering that economic growth will pick up and greater business confidence will encourage businesses to expand and start new businesses. So it is highly dependent on the economic outlook. ”
Read: Africrest Properties injects R800m into Sunninghill office-to-residence conversions
“I also think that an important point for the long-term prospects of the sector is that currently there are not many offices being built. Conversions are also going to happen … But it is something that happens slowly, so this is something that will develop in the long term. ”
“I think an important point also regarding ownership is that it is not something like a consumer product that can be easily cleaned or eaten like apples.”
We hear about the vacancies at the records office in Sandton, but what about Cape Town and Durban?
“The Durban CBD has struggled even before Covid showed up, and we received no data this quarter in terms of vacancy rates for the Durban CBD. But I looked at Sapoa [SA Property Owners Association] reports, and the average vacancy was 26% for grade A and B spaces. ”
“That is higher than all the other CBD. Then, [Durban] is under significant pressure. CBDs in general, I would say are under pressure. Johannesburg too “.
“Historically, Cape Town’s CBD is the one that has performed better than the others; but since the pandemic it has experienced a sharp increase in its vacancy rates, almost 20%. ”
“It was 11% just before the pandemic started. But in reality, most of Cape Town is under pressure. I don’t think it’s just the CBD. ”
“The general theme has been for office companies to cancel their leases and take up less space. In the office market, our survey shows that office rents were down 6% during the third quarter … I think if you consider some of the big discounts we’ve heard about from brokers and Reits, the rates rent reversal has been more than 20% for some companies. ”
What do you think about the residential real estate market and the growing expectations of interest rate increases?
“There has been a pretty solid performance from the housing market due to low interest rates. [we’ve] had since the pandemic. ”
“But let’s back up a bit. Remember last year when we had tough closings, we saw the closing of the Office of Scripture due to Covid cases; there were many delays in processing the transactions. ”
“Then we had that big rally in the second half of last year, and it was really when the market was very hot … Since then, it’s been getting colder and colder, even though house prices keep growing …”
“[House price growth] it is lower than inflation, but still holding up pretty well. However, I think the big test will come now, when interest rates start to rise … ”
“Many countries have started to raise their interest rates, like South Korea. Brazil has already done it twice, and has very high inflation, while New Zealand raised its interest rates last week… Everyone is looking at the United States. They could also raise interest rates next year. ”
“If all these countries raise interest rates, we also need to raise our interest rates to attract that much-needed capital. I think the important thing is that it is getting closer and if you want to buy a property, you have to consider that, because if we see enough increases in interest rates, there will be pressure to pay back the mortgages. ”
“It depends on how much interest rates increase. Rode’s baseline scenario is that rates could rise to roughly 8-9% in the next few years. ”
“Inflation is one of the issues internationally now due to all the shortages that are occurring due to Covid. So it’s definitely something to keep in mind. ”
Read: Aiming for higher inflation is the new panic in town