The commercial property market was forecast to improve this year, but was likely to only reflect this in 2025 returns due to market “leads and lags” and many risks, said FNB Commercial Property Finance’s property sector strategist John Loos.
He said in the bank’s latest Property Insights Note they expected the economic environment linked to the property market to improve mildly this year, but with various traditional “leads and lags”, which might only reflect in improved total property returns next year.
FNB expected economic growth to improve slightly from 0.8% in 2023 to 1.2% in 2024.
South Africa was likely to benefit from global economic growth as global inflation eased.
Domestically, power disruptions were less severe recently, compared to earlier in 2023, and FNB assumed this would remain so in 2024.
FNB expected there would be mild interest rate reductions from the start of the second half of 2024.
After a mild rebound in consumer inflation in October 2023 to 5.9% year-on-year, the rate slowed again to 5.5% in November, inside the 3-6% target range of the SA Reserve Bank (SARB) and well below the 7.8% high in mid-2022.
As inflation was still near the SARB upper target limit, “we don’t expect interest rate cutting just yet,” said Loos.
“Average CPI inflation for 2024 is expected to slow from 5.9% in 2023 to 5.2%. This, we believe, will lead to 75 basis points’ worth of interest rate cuts this year, with the prime rate declining from 11.75% to 11% by year end,” said Loos.
Recent attacks on shipping in the Red Sea, and the resultant military response from the US and UK, posed risks to global supply chains, thus posing inflation risk.
In addition, broader tensions in the Middle East, including the Israel-Hamas conflict, were an upside risk to oil prices should the conflict widen.
For the time being, oil prices were not exerting major inflationary pressure, said Loos.
Credit driven property buying/sales activity should begin to recover during 2024 after last year’s interest rate hike-driven slowdown, he said.
However, rental space demand in commercial property might take a little longer to improve, he said.
The rental component of the commercial property market had improved much since the 2020 lockdown “shock”.
The All Property Vacancy Rate of MSCI declined from a high of 9.5% in the first half of 2021 to 7.2% by the first half of 2023, according to MSCI half-yearly data due to declines in vacancy in all 3 major commercial property sectors, even the beleaguered office market.
“But vacancy rates can often lag economic fluctuations. The All Property Vacancy Rate peaked in the first half of 2021, a year after hard lockdowns, while the rise in vacancy rates in response to the 2009 GFC (Global Financial Crisis) only peaked around 2011,” said Loos.
The long term “correction” in real commercial property values was expected to continue in 2024, he said.
A key 2024 theme was likely to continue to be municipal and utilities service reliability.
Municipal rates and utilities tariffs were rising at rates well-above general inflation.
The search for areas and regions where “things work” was also likely to remain a key feature, causing considerable household and business “semigration” to continue.
The Western Cape was expected to be a key beneficiary and its economy and its property market was expected to continue to outperform the rest of the major commercial markets in 2024.
The status quo for the three commercial property classes was expected to remain in place, with industrial property the relative outperformer, retail in the middle, and the office market the weakest market.
The office market had the biggest challenges, with the highest national average vacancy rate despite some recent decline, he said.