The improved performance of the SA property market is expected to show green shoots in the second half of 2019. This will largely depend on the outcome of the elections, the direction of interest rates and more positive signs that the economy is recovering. If these factors start to point in the right direction, buyer demand will start to improve and property prices and rentals may start to firm up, albeit, off a much lower base.
As we enter 2019 South African investors in particular need to apply more innovative in their thinking and implementation in property management. It starts with being more pragmatic and proactive on critical non-performing indicators to make investments profitable.
There are core themes that underpin the property market , all of which may have significant implications for future trends. Dave Russell, Managing Director of Baker Street Properties shared property trends in the commercial sector at a recent SAPOA networking event. He said the costs to replace tenants is extremely high including factoring in installation allowances, marketing costs to find a tenant and having a minimum 3 year lease agreement in place to make it beneficial for good investor returns. Rentals remain flat across the board across property asset classes and vacancies are on the rise. especially in the office and retail sector.
Commercial rentals an indicator of strength in the market is still under performing. According to SAPOA Q4 stats vacancies in KZN Durban area are at 13,9% and CBD 19,5%. Johannesburg comes in at 12,8% and CBD 14,7%. Cape Town is not doing too badly at 7,8% and CBD at 11,8%. On closer inspection Sandton has a higher vacancy rate of 16,8% (323,000m2) of office space available than the Johannesburg CBD representing only 14,7% (282,000m2). This mainly because of the number of new developments that have come onto the market. This means that tenant retention is key for landlords. According to Russell, continued competition between landlords will increase with more and more concessions to tenants.
The rate of new construction plans passed is on the rise in the residential sector but has slowed in retail and commercial which has very little new commercial and retail development coming into the market. In the first of a four part series in this issue REIM unpacks the residential development hotspots in Johannesburg. Next month we unpack the Cape Town market.
Offshore markets such as the UK still offer opportunities if you play the negativity in your favour. The Brexit scare is holding back many new investors jumping in the market. A few of the JSE listed property funds with UK commercial portfolios (especially retail) are taking proactive action on uncertain Brexit outcomes. Many are renegotiating leases at higher levels long in advance of expiry with special agreements in place. This gives more certainty on rental incomes and to secure rent.
The US is starting to talk tough economic times ahead while Germany is in recession. The prospect of higher interest rates in the US and EU will increase market pressure. This time predictions are that it will be worse for a US downturn compared to 2008 as debt is currently higher. Federal Reserve debt has grown 600% in five years to over $5 Trillion. The time for discounted real estate coming into those markets will return.
In tougher times you simply cannot jump in and out of real estate very quickly, making it more difficult to be liquid. Properties must be managed more strategically, including vacancies and bad tenants.
“If you want to conquer fear, don’t sit home and think about it. Go out and get busy.”