HEIBERG ESTATES NEWSLETTER: APRIL 2023
Dear Property Partners
Economic challenges are increasing worldwide, especially looking at the latest IMF’s World Economic Outlook released report now predicting a low global economic growth rate of 2.8% for this year. Even more disturbing is the even lower outlook for SA’s economy which will also directly impact on all sectors of our fragile property market. Unfortunately, SA has the biggest decline in its growth forecast of all the markets the IMF monitors, where our economic growth forecast for this year is now predicted to be an alarmingly low 0.1% – down from the still low 1.2% initially predicted in January 2023.
The constant load shedding with hardly any light in the tunnel is playing a massive role in this state of affairs as well as directly limiting any plans and actions for economic reform, not to forget the rising costs of electricity where a price increase of 18.65% was granted by Nersa to Eskom. We desperately need direct foreign investments as well as to increase exports, also in order to create jobs for our millions and millions of unemployed people – and furthermore, to broaden our very limited tax base. But with slower global as well as local economic growth expected for the next 5 years, challenges all around will inevitably increase, and the SA Property Market is expected to be under downward pressure regarding both sales volumes as well as price increases for some time to come.
Fortunately, in spite of being fragile and facing headwinds for the past 3 years, our SA Property Market remains to be moderately resilient. Industrial properties is still the best performer for the fourth consecutive year where it recorded a total return of 13.5% last year – and is still expected to be on top of the best-performing sector for some time to come. Rising inflation and our interest rate escalating since November 2021 with 425 basic points to 11.25%, coupled with increasing operating costs (more details below), will further put challenges across all sectors of our SA Property Market.
Some of the latest interesting property-related facts and statistics as follows:
- Over the past five years operating costs has increased tremendously in every sector of commercial properties: as a percentage of gross income it rose from 37% to 45% for retail-, 32% to 45% for office-, and 32% to 36% for industrial properties.
- In December 2017 the average monthly gross operating costs/m² across all commercial sectors was just over R50/m² which has increased with more than 50% to R79/m² as recorded in December 2022 – the most prominent factors leading to this increase being the rising costs of electricity, municipal charges, and property taxes.
- A good barometer to measure SA Property activity is to look at our overall mortgage lending data. The lates mortgage data which has just been released by a FNB report, shows that the value of new mortgage loans granted for the 4th quarter 2022 declined year-on-year, so also a recent SA Reserve Bank report showed a return to negative growth after a slight positive growth rate of +0.47 was reported in the prior quarter.
- The growth rate in value of new residential mortgage loans granted declined by 14.46% year-on-year, of new commercial mortgage loans granted declined by -5.67% after recording a positive 1.4% positive growth rate the previous quarter.
- Since 1998 the real value of home loans declined by more than 10%.
- On the residential front property sales activities are very visible on the decline also measured by the steady decline in the approval of new building plans passed, whilst the construction category declined year-on-year by the most significant magnitude of -17.32%.
- Interesting to note that one of the most popular segments of our property market namely flats/sectional title, has also been under continuous pressure over the past few years where 15% less building plans were approved in 2022 than in 2021, and in 2020 there was a decline of 50% of completed flats put unto the market to be sold.
- The vacancy rates are also on the increase in the flat/sectional title segment – recorded at around 10% in Gauteng and 14% in KZN during the first quarter this year versus the 8.2% and 10.8% recorded during the previous fourth quarter, but in the Western Cape especially in Cape Town, this sector is booming due to semigration. Our national average vacancy rate as measured during just the first quarter, is also higher as the average taken over the three year period from 2017 and 2019.
- At this stage leading economists predict that it is questionable whether price increases for 2022, will be more than 2% in comparison to the 3.5% recorded for 2022 due to weakening household fundamentals and declining affordability with the basic cost of living rising across the board.
- The lower-than-expected economic growth outlook, will also have a negative impact on property vacancy rates. The vacancy rate for commercial properties increased form 4.2% as recorded in 2016 to 9.5% in 2021 and so far this year show further increases to more than 10%, coupled with further upwards pressure on capitalisation rates.
We always believe that every dark cloud has a silver lining, but realistically taking all relevant factors into account and especially our electricity fiasco, increasing operating costs and general real estate market uncertainties just to name a few, we do expect the SA Property Market for some time to come to be under pressure and facing increasing challenges, also taking into account that there is a lag time and dampening effect for interest rate hikes to take full effect on borrowing demand and general real estate market activities.
Please stay in contact for us for any property-related assistance you might need, or much-valued clients, friends and colleagues! It is always a pleasure to hear from you and share thoughts and ideas with you. Your continued support is sincerely appreciated, please be assured!
Best and warm regards
Sincerely
Bambie & Heiberg Estates Team
