As rising municipal rates and electricity tariffs shoot up and service delivery drops, homeowners will be looking to make the jump to areas where things aren’t falling apart – and the Western Cape is likely to benefit.

This was one of the key trends outlined in FNB’s 2024 property insights analysis by John Loos, a property strategist at the company’s commercial property finance department.

The insights report presents some optimism amongst experts for a “mildly improved” economic environment in 2024, which means that the year could yield better results for the commercial property market.

However, Loos said this is only likely to play out in 2025.

Loos noted that property investment may improve due to various economic reasons (interest rate cuts, lower inflation, etc), and investors may “in some ways” have a better year in 2024 than they have been experiencing.

“But improvement may only reflect in 2025 numbers, with various economy-property market ‘leads and lags,’ and risks remain abundant,” he said.

Key predictions

Among others, Loos outlined key predictions FNB has for the 2024 commercial property market, which include:

• Municipal and utilities service reliability remains a key theme for commercial property in 2024: The increasing municipal rates and utility tariffs are putting pressure on net property operating income. Although electricity supply is predicted to improve, people are likely to continue moving to areas where things work, resulting in semigration for household and business activities.
• The Western Cape is expected to be a key beneficiary of this semigration trend.

• FNB expects the status quo to remain for the relative performances of the major three commercial property classes: The industrial property is predicted to be the relative outperformer, retail in the middle, and the office market, whose vacancy rate remains very high despite some recent decline, will be the weakest market.

Economic influences analysis

Loos expects economic growth to improve slightly, from 0.8% in 2023 to 1.2% in 2024. “As global inflation eases, we expect to receive some benefit from improving global economic growth,” he said.

Consumer Price Index (CPI) inflation mildly rebounded to 5.9% in October 2023 but slowed to 5.5% in November, within the South African Reserve Bank’s (SARB’s) target range of 3-6%. Loos expects CPI to drop from 5.9% in 2023 to 5.2% in 2024.

As the inflation rate is still near SARB’s upper limit, interest rate cuts are not expected yet but may happen in the second half of the year – with Loos predicting a mild interest rate reduction of 75 basis points’ worth, which will decrease the prime rate from 11.75% to 11% by year-end.

“Inflation forecasts don’t come without risks,” said Loos, with geopolitical conflicts posing risks to global supply chains and, ultimately, inflation.

South Africa’s commercial property outlook

“Given a mildly improved outlook for growth and interest rates, it is conceivable that the commercial property market’s performance begins to improve mildly too in certain ways,” said Loos.

After a significant hiking cycle in interest rates in 2023, credit-driven property buying/sales activity is expected to begin to recover during 2024 after last year’s interest rate hike-driven slowdown. “However, it may be that rental space demand in commercial property takes a little longer to improve,” said Loos.

The 2020 Covid lockdown saw major devastation to the rental market component of the commercial property market, however it has since seen slight improvement.

According to finance company MSCI’s half-yearly data, the Property Vacancy Rate in the company declined from a high of 9.5% in the 1st half of 2021 to 7.2% by the 1st half of 2023. “This was due to declines in vacancy in all three major commercial property sectors, even the beleaguered office market,” explained Loos.

The rate of vacant properties may only sometimes reflect the current state of the economy. In the first half of 2021, the Property Vacancy Rate reached its highest point, one year after strict lockdowns were enforced. Based on this trend, FNB predicts that there could be a slight increase in the average Property Vacancy Rate in 2024 before it starts declining again in 2025.

This small rise in vacancy rates could be caused by the delayed financial impact on tenants due to the 2021-2023 interest rate hikes, as well as slower economic growth in 2021 compared to 2022 – which could lead to pressure on rental growth and property income in 2024.

“The long-term ‘correction’ in real commercial property values is expected to continue in 2024,” said Loos. “By ‘real,’ we mean that any capital growth that there may be will likely not keep up with general inflation, thus declining in ‘real’ terms.”

The real value decline evident in commercial property values is in response to real net operating income also having declined, “with stagnant economic growth since a decade ago unable to support positive real net operating income growth” he explained.