While brokers are more bullish in the commercial real estate market than last year, an economic slowdown and 375 basis point interest rate hikes since late 2021 could start to catch up with the market, said John Loos, FNB’s real estate strategist.
According to the bank’s Commercial Property Broker Survey for the first quarter of 2023, the majority (51%) of commercial property brokers in South Africa’s six major metropolitan areas are satisfied with the current market situation.
This is more than 47% of brokers in the fourth quarter of 2022.
The survey data was collected from estate agents in Joburg and Ekurhuleni (Greater Johannesburg), Tshwane, Ethekwini, Tshwane, the City of Cape Town and Nelson Mandela Bay.
“This means that the starting level of broker confidence in 2023 is still higher than the level it started at in 2022.
“However, this level of confidence remains medium, still implying that a significant 47% of respondents are dissatisfied with the terms,” said Loos.
The activity of brokers, on the other hand, paints a less hopeful picture.
When asked to rate market activity levels on a scale of 1 to 10, the average rating of the group of respondents was slightly lower across all property classifications, namely office, commercial and warehouse space, as well as retail.
Despite a small dip from 6.35 to 6.31 in the first quarter of 2023, commercial real estate agents in South Africa remain optimistic about the industrial and warehouse property market, which has the highest activity score of the three property classes.
In the same period, retail property activity fell from 4.71 to 4.44, while the rating of market activity in the office market remained the lowest, from 4.15 to 4.08.
“Economic growth slowed in the last quarter of 2022 as expected, and this may have had a partial cooling effect on the commercial real estate market leading up to 2023,” said Loos.
“Much of the impact of interest rate hikes on the economy comes with a lag and so may indirectly impact real estate demand beyond the direct impact via the increased cost of paying off mortgage debt,” said the FNB strategist.
Real GDP growth slowed in the fourth quarter of 2022, from 1.8% in the third quarter to 1.3% at the end of the year; this slowdown may become apparent in the commercial real estate market.
South Africa’s cycle of rate hikes began in November 2021, and FNB is forecasting another 25 basis point hike in March, closing the cycle with a top rate of 11.00%.
According to Loos, the projection is affected by a fall in CPI inflation from a peak of 7.8% on an annual basis in mid-2022 to 6.9% in January 2023, with a large drop in fuel price inflation playing a role.
