The Good and the Bad

Deciding to invest in property is the easy part. Next, you need to decide which sector is the best bet for your money. With near-daily fluctuations in the local market, it can be difficult to know which type of property will best suit your needs. Before we get into it, let’s break it down to the basics. We’re looking at residential and commercial property. Each of these can be broken down into their respective subsets. It’s important to note that no one type of investment will be good in all parts of the country. As always, be sure to do thorough research into the area you’re investing in, and don’t be shy to ask around and get the best possible advice from local experts.


For many investors, residential property is their first play at the real estate investment game. It’s a simple market to understand, since we’ve all been living in some type of residential property for our entire lives. But not all residential property will give you the same types of returns. The FNB Area Value Band House Price Indices, published in May, groups areas according to their average home transaction values, using deeds data, and include all cities and towns in South Africa.

The five indices are the Luxury Area House Price Index (Average Price = R2.358 million), the Upper Income Area House Price Index (Average Price = R1.251 million), the Middle Income Area House Price Index (Average Price = R895,089), the Lower Middle Income Area House Price Index (Average Price = R577,587), and the Low Income Area House Price Index (Average Price = R364,937).

According to John Loos, household and property sector strategist at FNB, The Low Income Area House Price Index was again the strongest performer in terms of year-on-year house price growth, recording 13.9% year-on-year for the 1st quarter. This is an acceleration on the prior quarter’s revised 13.7%. Loos is sure to point out, however, that these figures can be misleading. “This index includes the subsidized housing component, and new homes in this category, which are not sold to their new owners, and are often registered at a value with the deeds office which does not reflect any market value.

“Over the years, there have also been periodic sell-offs of rental stock by councils which have not necessarily taken place at market value. Such distortions mean that in a repeat sales index for Low Income Areas, many homes prices come of a very low base not reflective of market values, and show major price inflation when resold at market value at a later stage,” he explains.

Looking at the Lower-Middle Income Area Value Band, we see a 7.6% year-on-year value growth, the second strongest rate behind the Low Income band. This, Loos explains, is possible evidence that the lower end has recently been showing strength relative to the higher end. He notes, however, that the year-on-year growth of this band is slightly lower than the previous quarter’s rate (7.7%), and suggests that the segment may have been peaking recently.

Over in the Middle Income and Upper Income Area Value bands, year-on-year house price growth accelerated slightly in the 1st quarter of 2018. The Middle Income Area Value Band from 4.9% in the 4th quarter of 2017 to 5%, and the Upper Income Area Value Band from 5.4% to 5.5% over the same 2 period.  The Upper Income Area House Price Index showed its 4th consecutive quarter of quarter-on-quarter growth acceleration, from 1.39% previous to 1.42% in the 1st quarter of 2018, while the Middle Income Area Value band saw a 3rd consecutive quarter of acceleration from 1.23% previous to 1.31% in the first quarter of this year.

Loos explains that these figures suggest superior price growth performance at the lower-priced end of the market where average prices are well-below R1m, but that the magnitude of lower end “outperformance” relative to higher end areas may diminish in the near term.  “At some point stronger house price growth in traditionally more affordable suburbs leads to their becoming less affordable, and their “value for money” attractiveness diminishing relative to more expensive suburbs. In addition, sentiment in South Africa early in 2018 seems improved, interest rates are declining mildly, and leading economic indicators have been pointing towards a strengthening economy. This could lead to that search for relative affordability of recent years, that benefited the lower end more, just diminishing in strength somewhat,” he says.

The Luxury Area Value Band continued its run of slowed growth, seeing the most significant slowdown of all the value bands since 2014. In the first quarter of 2018, this band saw its growth rate fall from 5.2% in the previous quarter to a rate of 4.9%. Loos comments, however, that there has been a near leveling out of the growth rate,  slowing only very slightly from 1.16% in the previous quarter to 1.15% in the 1st quarter of 2018.

Samuel Seeff, chairman of the Seeff Property group, warns that investors should pay attention to the market: “While property barometers point to improvement ahead, they still tell the story of a flat market which largely favours buyers. Recovery is usually first felt in the primary urban Gauteng (Johannesburg/Pretoria) areas and thereafter in the coastal and other inland metros. This seems to be what we are beginning to see from the latest property market data.”

By looking at building statistics, it’s possible to paint a picture of growth and demand in certain areas and sectors. Absa’s Residential building statistics were published in May, and do just that. According to Jacques du Toit, property analyst for Absa Home Loans, explains that divergent trends were evident in levels of building activity in the South African market for new housing in the first quarter of 2018.

The report looks at residential property in three categories: Houses of <80m², Houses of ≥80m², and Flats and townhouses. According to the report, the number of new housing units reported as being completed was lower in each of the three categories of housing in the first three months of the year, which resulted in a combined decline of 25% y/y, or 2 547 units, to a total of 7 652 units over this period. The segments of houses smaller than 80m² and flats and townhouses showed a contraction of 37% y/y and 27,4% y/y respectively in the first quarter of the year.

The Western Cape and Gauteng were the clear leaders in new residential properties being completed, accounting for 43% and 35.2% of the national total, respectively. According to the report, the number of new housing units for which building plans were approved, increased by 17,1% year-on-year (y/y), or 2 245 plans, to 15 233 plans in the period January to March this year. “This growth was largely the result of trends in plans approved for houses smaller than 80m², which showed growth of 33% y/y, and plans approved for flats and townhouses, which increased by 14,7% y/y in the first quarter of the year,” Du Toit comments.

Looking at Lightstone’s annual inflation research, freehold properties are seeing a slowdown in value growth, while sectional title growth is increasing. Freehold has seen a 3% growth in March of 2018, down from 3.8% and 3.5% in January and February respectively. Sectional title, on the other hand, has seen steady growth in value, sitting at 4.2% in March – up from 4% and 4.1% in January and February. It’s also interesting to note that, since the third quarter of 2017, sectional title properties have seen growth from 3.7%, while freehold has declined from 4.7%.


While residential property remains a popular option for investors, many are itching to diversify their portfolios. The commercial sector – primarily consisting of offices and retail properties – can be a dynamic and profitable market. Let’s look at the latest figures and stand-out performers.

According to the JLL Q4 2017 Retail Market report, small regional shopping centres continue to outperform other types of retail centres. The report notes that retail vacancy rates rose across the board, with small regional centres seeing a decline in vacancies. Annualised trading density growth for these centres took a knock, but remain marginally positive.

In 2017, more than  300,000m² of retail accommodation was completed (including refurbishments and extensions). At the same time, it’s important to note that retail trade sales for the same period was poor, reflecting a clear consumer concern for economic growth. The report explains, however, that these indicators are expected to improve throughout 2018, with factors like household credit extension showing signs of improvement and offering consumers some relief.

The report divides retail property into five categories: neighbourhood, community, small regional, regional, and super regional. There is a clear pattern in trading density growth, as at Q3 2017. Super regional centres saw a decline of 5.6% and regional of -0.7%. Small regional saw an increase of 0.7%, community saw an increase of 0.1, and neighbourhood an increase of 0.9%.

According to Spire Property Management’s Executive Director, Sean Paul, neighbourhood retail centres that are situated within residential nodes are more resilient to market swings than others: “They are very attractive from a convenience point of view. Consumers living in the nearby suburbs will frequent their local centre on an almost daily basis to purchase household goods and groceries, to enjoy a meal at their local restaurant or socialise over a cup of coffee, and make use of other services offered such as a laundromat or hair dresser.”

These centres also tend to be more attractive to tenants, as rent is generally much lower than those in larger centres. “These centres often operate on a gross rental structure rather than a turnover based structure. This is appealing to entrepreneurs and small business owners who can be daunted by the high costs associated with renting retail space in a large shopping centre, and also like the certainty of fixed rentals for budgeting purposes,” Paul explains.

He does caution, however, that tenant mix and location are essential: “Shops and services need to be matched to the affluence levels and the needs of the surrounding neighbourhoods.”

Over on the office front, location really is key – but this shouldn’t be news at this point. Looking at three major office locations – Bryanston, Cape Town CBD, and Durban CBD, Broll Property Group has recently released the key factors that drive growth in these sectors.

Each of these areas are easily accessible via their respective highways, making them prime locations for businesses. Worsening traffic around the country also means that there is an increased focus on offices that are situated in areas serviced by reliable public transport.

According to the reports, Cape Town continues to buck the national trend with a healthy outlook for 2018 and decreasing CBD vacancy figures, down from 11.5% in June 2017  to 9.9% in February. National inner city office vacancy rates were down to 14.5% with the country’s city decentralised nodes at an aggregate vacancy rate of 10.2%.

The city has seen increasing take-up and repurposing of older B and C-grade premises within the CBD as local and, more increasingly, national purchasers strive to get a foothold in the market. The report also notes that P-grade space tends to be limited due to a lack of new developments, with vacancies around 10.6%.

A-grade vacancies have been decreasing, sitting at 6.0%, while B-grade and C-grade buildings were 10.4% and 19.5% vacant. B-grade buildings were sold for prices ranging from R10,000 to R14,000/m², either to be refurbished or demolished, or to be repurposed for residential uses. The V & A Waterfront, with an almost negligible office vacancy rate, remains as the City’s premier office node with BAT, EY and PWC having relocated to the precinct over the last two years.

The big trend in the Mother City is mixed-use developments, based on the perceived future demand for these types of setups. Several developments are planned for the Foreshore and Harbour areas, with completion estimated within the next decade. Gross rentals achieved in the city vary from R90-R120/m², with an ever-present growth in demand.

Over in Bryanston, the report explains that affordable rental prices within the node continue to attract tenants who want large, modern office spaces with sufficient parking and good security. The are has seen a steady stream of new commercial and residential developments being released into the market over  the past few years, with approximately 53% being A-grade.

Bryanston hosts large Blue Chip corporate tenants such as Microsoft, Dimension Data, Tiger Brands, Facebook, Google, The Media Shop, Samsung, The City Lodge Hotel Group and Internet Solutions. Recently the node has become home to WSP, Gold One as well as the YUM group. Furthermore, around 22,600m² is expected to come into the market, of which less than 20% was available at the time of the report. The area has also seen a steady supply of P- and A-grade office buildings being constructed over the past year.

The area is in demand with tenants looking to escape the bustle of Sandton, in exchange for office parks that tend to be more spacious and offering more open areas. As at Q4:2017 the Bryanston node recorded an overall vacancy rate of 9.1%, with A-grade buildings being roughly 91.6% let and B-grade stock averaging a 9.4% vacancy rate. Gross rentals achieved are approximately R150/m².

The Durban CBD comprises a wide range of office buildings. Due to historically lower levels of investment in the area, many buildings are run down and considered to be C-grade. These make up about 50% of total stock. Many B-grade buildings have been either regularly maintained over the years or upgraded to A-grade buildings. A- and B-grade buildings each comprise approximately a quarter of the total stock. Industry statistics indicate that buildings in the Durban CBD are approximately 80% let for A-grade stock while C-grade stock and B-grade buildings face slightly lower vacancies.

The city is seeing continuous urban regeneration initiatives, resulting in an increased demand for quality office space from both the private and public sectors. It has been noted that corporates have been decentralising, with smaller companies recently taking up available spaces. There has also been increased take-up from government, call centres, educational facilities and companies seeking central locations. As in other CBDs, there is also a trend towards converting some office buildings into either educational or residential buildings – but this hasn’t seen the success witnessed in areas like Johannesburg. The report also notes that there is a demand for smaller office spaces, tenanted by SMEs.

Durban’s close proximity to the port has made it a popular choice for shipping, logistics and maritime companies, while the legal professional community has also made long term commitments to targeted developments in the area. According to Broll, the main challenge for the area is the oversupply of lower quality stock in need of refurbishment.

The opportunity for investors is clear, since there is an ever-growing demand for higher quality and safer office spaces. The area is seeing little activity in terms of new builds, with focus being shifted to refurbishments. As these buildings are improved and updated, the report notes that values in the area will rise along with achieved rentals. As at November 2017, gross rental achieved varied from R80-R110/m².


Finally, let’s take a quick glance at industrial property. The industrial sector has traditionally been seen as a top-performing asset class, evident in MSCI’s IPD SA bi-annual property index published towards the end of 2017. The report stated that direct and indirect industrial property combined achieved a 7% total return in the first half of the year, with overall vacancies also declining – down to 3.5%. Zandile Makhoba, head of research at JLL, however warns that the market needs to pay attention to supply and demand.

“While the industrial market seems far from experiencing an oversupply at current vacancy rates, it is important to note that demand is beginning to flatten. The uncertain consumer market also forewarns of pressure in the market during 2018. Some industrial areas saw a bit of a rental correction in Q3 2017, highlighting that there is some pressure in the market in the year ahead – just not as much as we are seeing in other sectors such as the commercial market,” she explains.

With the increased popularity of modern, new industrial parks, older developments are increasingly under pressure to find and retain suitable tenants.  “In Johannesburg alone, there is at least 500,000m2 of accommodation in the pipeline,” Makhoba says. Figures from the JLL Industrial Report mirrors Makhoba’s concerns.

It states that 2017 Q4 figures show a growing trend, with Grade P accommodation showing an uptick in rental rates, but the opposite happening for Grade A and Grade B accommodation. This is an indication of a segmented market developing: on the one hand Grade P space continues to be landlord driven, and on the other hand an occupier market is developing in the Grade A and Grade B sector, with landlords incentivising occupiers with lower rental rates.

The industrial market is traditionally governed by two sectors – manufacturing and trade. Both of these experienced struggles in the past year, with trade seemingly picking up. Another factor to consider when looking at industrial property is the growing demand for warehousing and logistics. As the online shopping market begins to grow on a local scale, online retailers are in need of more space. Finding industrial property that offers tenants safe, convenient and central locations is crucial.

Whether you’re looking to invest in the residential, commercial, or industrial market, it’s essential to do your research. Each sector, while riddled with challenges, holds opportunity for the astute investor. Knowing where the market is heading and what tenants will want or need five or ten years down the line is key to finding the right property to invest in.




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