MyJHB

Stuff from Johannesburg

Further interest rate hike, along with lagged impact of past ones, likely to sustain slowing commercial property market trend into 2023

By John Loos, Property Sector Strategist at FNB Commercial Property Finance

The SARB’s 75 basis point interest rate hike announced brings the cumulative amount of interest rate hiking since November to 350 Basis points.

Further interest rate hike likely to sustain a market “weakening” trend into 2023: This cumulative impact of SARB interest rate hiking, accompanied by interest rate hiking globally that is cooling off the global and domestic economy, is believed to be having both direct and indirect “cooling” impacts on the commercial property market.

The interest rate hike adds to the weakening market trend already believed to be in play, the cumulative direct and indirect impact on the market from 350 basis points’ worth of hiking since November 2021 expected to become significant now:

  • The “direct” impact on property buying demand comes from the fact that the market is highly credit-driven, and the cost of servicing debt is rising.
  • The “indirect” impact is happening through the weakening impact on the economy that local interest rate hiking is having. This constrains new business growth and existing business expansion, containing commercial tenant demand for rental space as well as commercial property buying. It comes at a time when the global economy has also been slowing, impacting further on SA’s economy through the trade effect.

In the FNB Property Broker Surveys, we have already seen both property buying activity levels as well as rental market activity levels in all 3 major markets (i.e. Office, Retail and Industrial) down from their post-lockdown highs reached earlier in 2022, so this latest SARB interest rate hike can only likely add to the slowing trend in market activity already believed to be in play, and likely extend the slowing trend into 2023.

Further weakening in rental tenant payment performance likely: The interest rate hike also potentially heightens the financial pressure for the existing commercial tenant population, whose payment performance early in 2022 has already shown signs of starting a renewed deterioration. While tenants don’t necessarily have mortgage debt, they often have other business debt that becomes more costly to service as interest rates rise.

Vacancy rates at in office and retail property space may rise further, with Industrial possibly also set to start to rise: In the 1st half of 2022, we saw mild increases in the average office and retail vacancy rates nationally, with only Industrial Property showing a decline in its vacancy rate. We expect the vacancy rates in office and retail to continue to rise into 2023, while Industrial’s declining vacancy rate decline may end and begin to move higher in the near term too, the rising vacancy rate move thus likely broadening .

Near term rental deflation in retail and office property is an increasing possibility, although the stronger industrial market with its lower vacancy rates may avoid this.

Upward drift in capitalisation rates and decline in real values expected to continue: Further increase in interest rates is an additional source of upward pressure on commercial property capitalisation rates, and the multi-year upward drift in the major property classes’ capitalisation rates is expected to continue in the near term. This in turn leads to the expectation that the All Commercial Property capital value/square metre will continue to decline in real (inflation-adjusted) terms.

This would imply very low capital growth that doesn’t keep up with general price inflation in the economy, thus declining in what economists’ call “real” terms. Real declines are expected most in the office and retail property classes. Given the very significant magnitude of rate hikes in the current cycle now, full blown negative capital growth into 2023 can’t be ruled out.

Decline in business activity: We are already seeing a broadly declining trend in commercial space building plans passed, while residential building planning activity began to decline year-on-year in the 3rd quarter. We expect further residential building planning and activity decline in the near term in big part due to interest rate hiking.

Slowing new commercial mortgage lending growth: Near term decline in new mortgage loans granted and registered is a likely possibility due to interest rate hiking. It is not clear whether commercial mortgage advances growth will slow from its recent low single digit growth rate. This is because, while new lending may decline, the speed at which capital repayments on existing loans are made may also slow due to the higher cost of debt servicing.

Residential rental market expected to strengthen further: We expect credit-dependent home buying to slow in the near term as a result of ongoing interest rate hiking, with a portion of aspirant home buyers waiting it out in the residential rental market. This is expected to lead to further decline in residential rental vacancy rates, and a mild near-term rental inflation acceleration.

Category:

The Geological Miracle of the Witwatersrand

The very existence of Johannesburg is a geological fluke. Unlike most major global cities, Johannesburg was not built near a river, a coast, or a natural harbor. It sits 1,753 meters above sea level on a rocky ridge called the Witwatersrand (Ridge of White Waters). This ridge is the edge of the world’s largest known gold deposit, formed over 2 billion years ago when an ancient inland sea began to evaporate, leaving behind layers of gold-bearing conglomerate.

When George Harrison, an Australian prospector, stumbled upon an outcrop of gold on the farm Langlaagte in 1886, he triggered a “gold rush” that changed the course of African history. Within a decade, a dusty collection of tents and wagons transformed into a permanent city of brick and mortar. The “Main Reef” proved so vast that it eventually produced nearly 40% of all the gold ever mined in human history. This geological wealth dictated the city’s layout: the mining belt runs east-to-west across the city’s center, creating a physical divide between the wealthy northern suburbs and the industrial, working-class south. Today, while most mines within the city limits have closed due to the extreme depth and cost of extraction (some mines reached over 3.9 kilometers underground), the physical legacy remains in the form of “mine dumps”—massive yellow-white hills of crushed rock and sand that define the Joburg skyline.