This issue shows that the industrial property market is still best placed of the major non-residential property types, but is also showing signs of slowing down, such as weaker rental and stand value growth. This was to be expected, given the state of the economy and in particular the pressure on the manufacturing and retail sectors. Of course, the electricity crisis is also a large negative factor.
The office market is still worst placed but is showing some improvement with vacancies declining further.
House prices have come under renewed pressure, while flat rentals are showing the opposite trend.
A summary of the main findings by property type follows.
Office market
The office market remains in the worst position of the three major non-residential property types due to its significant oversupply. Encouragingly, Rode’s second-quarter 2023 data continues to point to an improvement in vacancy rates, while nominal market rental growth remains in positive territory. However, REITs are still generally reporting large negative office rental reversions as contractual rentals have escalated by much more than the growth in market rentals.
The outlook for the office market is clouded by the poor economic outlook and the remote-working trend. It is worthwhile also to look at global trends with regard to working from home. Rode’s research shows that Americans are also returning to offices, but occupancy levels remain low. It is noteworthy that several of the big tech names, like Google, are pushing workers back to the office and even getting stricter on the management of this. That said, hybrid working policies, for example three days in an office, remain the popular choice, which means less demand compared to pre-Covid levels.
Nationally, weighted market gross rentals for decentralized grade-A space increased by 3,5% in nominal terms in the second quarter of 2023 compared to the second quarter of 2022. This comes after growth of 3,2% year on year in the first quarter of 2023, which shows that nominal rentals have bottomed out after falling sharply during the pandemic. But to give perspective, the second-quarter nominal rental rate on a national level was still 3% below 2019 levels (that is, before the Covid pandemic). In real terms, second-quarter decentralized rentals fell further into negative territory after deducting the BER’s roughly 10% estimate of building-cost inflation.
Regionally, Cape Town has been the clear top performer over the past few quarters, after a serious rental dip of 10% in 2021. Nominal grade-A gross rentals increased by 13% in the decentralized nodes of the Mother City compared to a year earlier. In Pretoria, these grew by 3,6% and by 1,6% in Johannesburg. In real terms, only Cape Town managed to record above-inflation rental growth compared to a year ago. Durban decentralized rentals fell by 1,1% − the second consecutive quarterly year-on-year decline, but some nodes like La Lucia Ridge/Umhlanga still performed well.
The results of Rode’s office vacancy survey show that vacancy rates in South Africa improved further during the second quarter of 2023. We found that the average vacancy rate of grades A+, A and B space combined was 14,5% in the second quarter of 2023, lower than the 14,9% in the first quarter of 2023, largely thanks to less vacant space in Cape Town and to a lesser extent in Johannesburg.
Industrial market
The results of Rode’s second-quarter 2023 survey show that the industrial property market is still best placed of the three major non-residential property types thanks to its relatively higher rental growth and low vacancy rates. However, the market is starting to slow down, as mentioned earlier.
Nominal gross industrial market rentals for space of 500 m² grew by 4,1% in the second quarter of 2023 compared to the second quarter of 2022. This is slower than the 5,1% year-on-year growth recorded in the first quarter of 2023 and was the second consecutive quarter of weaker growth. In real terms, rentals are still declining after deducting building-cost inflation.
Regionally, nominal rental growth was the strongest in Cape Town and the East Rand at 7% and 6% respectively. Both these conurbations saw an improvement in vacancy rates in the first half of 2023 to 2,0 points on Rode’s scale (from 1 to 9) or 3,4%. Nominal rental growth in the Central Witwatersrand and Durban was slower at 3,2% and 2,2% respectively.
We are surprised that industrial vacancy rates remain low and that they even declined further during the second quarter of 2023 to an average of 3,9% on a national level. Perhaps landlords have kept vacancy rates low at the expense of rentals, as reversion rates on new leases have been negative for most REITs. Remember that contractual rentals have escalated by more than market rentals.
It can also be that landlords have decided to not be too hard on tenants due to the extra money the latter need to fork out for power, such as diesel for generators. Growthpoint, the largest SA REIT, said in June that “load shedding severely affects manufacturing and production tenants, raising their costs, straining occupancy affordability and contributing to more tenant failures”. We believe rising vacancy rates could well start to show in the coming quarters.
Residential market
The housing market continues to slow down due to lower effective demand for property due to the weakening economy, the higher cost of living and rising interest rates. Nominal prices grew by 1,9% in May 2023 compared to May 2022, the slowest growth rate since July 2020, based on FNB data. Prices grew by 2,3% in the first five months of 2023 compared to the same period in 2022. This indicates a slowdown from mini-boom levels during the Covid pandemic, when the prime interest rate fell as low as 7%. In real terms, house prices in the first five months of 2023 fell sharply.
Interest rate hikes started to affect prices and sales activity more materially in the second quarter of 2023, especially in Gauteng, and the impact thereof is not over yet. More sales have also occurred due to owners experiencing rising financial pressure.
Turning to flats, vacancy rates on a national level averaged 6,9% in the second quarter of 2023, unchanged from the first quarter of 2023, according to Rode’s residential survey data. This is better than the 8,3% average of 2022. However, vacancy rates are still slightly above the 5,3% average recorded in the three years from 2017 to 2019 that preceded the pandemic.
The improvement in national vacancy rates since 2021 has supported flats’ rental growth. Official data from Stats SA shows that nominal flat rentals in South Africa in the first quarter of 2023 increased by 2% compared to a year earlier, in line with the 1,9% growth in the fourth quarter. PayProp data shows that nominal rental growth lifted to an even higher 4,2% in the first quarter of 2023 − the fastest growth since the fourth quarter of 2017. However, reduced affordability is negatively affecting the sales of flats, with several of Rode’s survey respondents reporting a quiet market. All in all, house prices and rentals are still declining in real terms in most parts of the country.
Retail market
The retail property market made a strong comeback in 2022 but has been under pressure so far in 2023 as demonstrated by the weaker retail sales performance and higher mall vacancy rates. This is reflected in the higher Rode capitalization rates of regional shopping centres. The retail property market is covered in detail in our sister publication Rode’s Retail Report.
To subscribe to Rode’s Report on the South African property market or Rode’s Retail Report, please contact Juwayra Januarie on 021 946 2480 or send an email to juwayra@rode.co.za.
For more information contact:
Kobus Lamprecht
071 410 7978
Erwin Rode
082 431 7193
