File picture: James White
File picture: James White

Interest rate cut may stregthen commercial real estate sector

By Staff Reporter Time of article published Jul 18, 2019

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CAPE TOWN – South African Reserve Bank (Sarb) Governor Lesetja Kganyago announced today that the monetary policy committee (MPC) decided to reduce the repurchase rate by 25 basis points to 6.5 percent per annum.

Chief executive of Galetti Corporate Real Estate, John Jack stated that this move is welcomed by the commercial property sector, but it may not stem the tide against falling property values warns property experts. 

John Jack said in a statement: “The rate cut by 25 basis points to 6.5% is a good stimulus for the commercial property sector but we also need to see real GDP growth to halt the rising vacancy trend.” 

Jack explains that it will help add more money in property owner’s pocket because the rate cut reduces the cost of debt giving landlords the ability to service more debt or appropriate rental income to pay down the bond - or in the case of no income, the reduced interest rate causes less of a hole in the income statement. 

“Everyone welcomes a lower bond repayment when incomes are under pressure,” said Jack. 

However, he states that the office sector is still experiencing high vacancies and it may be some time before we see any impact of today’s MPC decision. 

According to the South African Property Owners Association, the national office vacancy rate is in the double digits at around 11 percent. 

Earlier this year, global company MSCI released figures showing that the national office vacancy rate for the last quarter of 2018 was 12 percent. 

Broken up into Office CBD and Office decentralized nodes, their figures showed vacancy rates of 16.9 percent and 11.2 percent respectively. 

“Vacancies have increased across the board, most significantly in the office sector,” Jack said.

“Rentals are under pressure and in certain circumstances reversions are close to 30% reduction in rentals. Oversupply in certain nodes, such as Midrand and Sandton, is partly to blame. The current trend towards co-working office spaces is mooted to have a positive impact on reducing office vacancies. The key to overall vacancy reduction is seeing growth in the economy.” 

Jack added that occupiers who are seeing increased debt levels in relation to their market cap may require refinancing at higher levels and that he believes that this rate cut will allow them to re-base their position.

“Reductions in bond repayments allows landlords to reduce the required rental, perhaps to a level that would entice an occupier to relocate to their building.” 

Jack believes that a lot of focus is being put into attracting talent within the office sector. 

“The better the building and better the position, ultimately the better staff you will be able to attract to your business," said Jack.


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