Third-quarter Rode Property Report highlights

We are pleased to provide you with valuable insights from the third quarter Rode Property Report. It sheds light on the challenges faced by the property sector, how they affect capitalisation rates, and the performance of different property types.

Market Overview

The property sector continued to face challenges in the third quarter, including power problems, elevated interest rates, rising operating costs, and poor municipal service delivery. The global and South African economy's low growth added to the sector's troubles.

Several Real Estate Investment Trusts (REITs), including Growthpoint, have issued gloomy forecasts for the year ahead. This has led to elevated income yields and reduced net asset values (NAVs) for REITs. Lower NAVs can trigger loan-to-value ratio issues for investors, requiring property sales to rectify the situation.

Property Typology Insights

Industrial Property remains the best-performing category among major non-residential property types. Low vacancy rates have contributed to relatively stronger rental growth, with nominal gross market rentals for 500 m² spaces increasing by 3.8% in the third quarter of 2023.

Regionally, Cape Town stands out as the top performer, with rental growth exceeding pre-COVID levels by 5%. This performance is indicative of the sector's resilience in the face of economic challenges.

Offices continue to be the weakest category. Oversupply issues have kept decentralised vacancy rates in South Africa above the long-term average of 9%. Encouragingly, the decentralised vacancy rates for grade A+ to B space declined to 14.4% in the third quarter of 2023, an improvement from the third quarter of 2022 but still significantly above average.

Office rentals are recovering, but at a slower pace, and in real terms, they remain bleak. Many companies have adopted hybrid work arrangements, reducing the demand for office space.

In the Residential Market, house price growth has weakened, and flat rentals are showing a more positive trend. However, prices and rentals, when adjusted for inflation, remain in negative territory, primarily due to the challenging economic environment and elevated interest rates.

Conclusion

The property sector faces multiple headwinds, and listed property funds have seen their values decrease due to these challenges. Industrial properties have shown resilience, while offices continue to struggle. The residential market is also grappling with slow growth and real-term declines in property values and rentals.

As the year unfolds, the sector's performance will be closely linked to economic growth, interest rates, and the ability to navigate supply and demand dynamics effectively.

In conclusion, the property market is facing numerous challenges, but there is hope for improvement in the future. We will continue to monitor the situation and provide you with updates as the market evolves.