As one of the hardest hit sectors globally, what is becoming apparent is that the rate of recovery may not be as dismal as initially thought. The biggest threat to the rebound of this sector is the general sentiment of the economic and political landscape as well as omnipresent vaccine hesitancy and misinformation.
The residential market has been defying odds during the pandemic where prices have increased in line with the consumer inflation average of 4.3% for 2021 year to date. Unemployment has reached a record high of 34.4% and with consumers digging deeper into their pockets, residential market prices seem to have flattened in recent months. We anticipate that pre-covid price normalisation could still take another 1 -2 years. Residential vacancy rates have slowly dropped since peaking at 13% during the last quarter of 2020 but remain strained at 5% higher than the pre-covid levels.
Industrial property has steadily plodded along as most lockdown restrictions have squeezed manufacturing output in the last 18 months. The general economic conditions have seen rentals increase well below inflationary levels.
The retail market, much like the industrial sector, has been grappling with the delayed effect of state lockdowns. With consumers digging deep into their pockets and the online retail space growing in South Africa, retail property rentals remain flat and vacancies are still high relative to pre-covid trading. The good news is that both industrial and retail sectors are slowly recovering with growth doubling from the first to second quarter of 2021, albeit from a small base.
The office market continues to take on the brunt of the virus which appears to be consistent with the global trend. Local vacancy rates in the office space are at the highest levels in the past century which is testament to the WFH (work from home) revolution where many professional and service driven firms have managed to keep productivity and billings ticking over from the comfort of their flannel pyjamas. An over-supply of office space has saturated the market which has given tenants leverage in terms of escalations, concessions, and discounts. Alarmingly, office vacancy rates have been as high as 20% in major nodes such as Sandton, an area purportedly home to the richest square mile of real estate on the African continent.
Capitalisation rates in the office and retail sectors have continued a downward trajectory. This has had a severe impact on the value of JSE listed Real Estate Investments Trusts (REITs) as well as a negative effect on their ability to distribute 75% of their earnings to maintain their tax-exempt status. Loan to value (LTV) ratios have been under the spotlight as finance houses look at possible breaches in covenant terms and the ability of property businesses to settle their debt.
Despite all the recent trials, JSE listed real estate stocks have staged a remarkable recovery. A steady rebound in listed property in 2021 indicates optimism which is attributable to both the roll out of the vaccine and the surprising resilience of the South African economy.
It is unlikely that the work from home culture is sustainable as most of us are social beings who crave personal interaction outside of the home environment. A hybrid approach may well be the future of office space utilisation, allowing for the rotational use of workplace seats. This by no means signals the death of the traditional office but it requires more of a reimagination of how office space will be utilised in future. Property market buoyancy is heavily reliant on a well-functioning economy, lower unemployment rates and investor confidence.
South African construction in the first quarter of 2021 was down 17.5% on a year-on-year basis, following a fall of 19.8% in the final quarter of 2020, according to Statistics South Africa. The local government during a recent budget speech announced a stimulus plan to awake the economy with over USD 45 billion, targeted mainly for infrastructure development. As a result, the construction sector in South Africa is expected to rebound and show growth after 4 years of steady decline.
Vaccination coverage is mostly within our control and the sooner herd immunity is achieved; the sooner business can return to normal. A forward-thinking government with a strong moral compass would undoubtedly assist in reigniting business confidence and provide a much-needed boost to our crippled economy.
Sources: Rode Report Q3 2021, Statistics SA
Moore has with a wealth of experience in the real estate and construction sector with dedicated experts who have assisted our clients achieve their business goals, for more information contact your
local Moore Office.