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Few things have a greater impact on the economy than an interest rate hike or cut. A hike is often welcomed by savers, especially if that is passed on by the banks via their savings products but it’s equally frowned upon by those of us in debt as it makes borrowing more expensive.
Last year we wrote about how the low interest rates honeymoon period could soon be over. And we were right!
Last month, the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) made the decision to up the repo rate by a further 25 basis points after it made the first hike in a while back in November 2021 – which also resulted in a 25-basis point increase.
This was done on the back of rising inflation – something which has become a global issue of late. So, what kind of impact will last month’s rate and any subsequent ones have on the property market (retail and office) this year?
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Retail impact
The retail rental market was once the property industry’s ‘darling’ in the run up to the global financial crisis (GFC) of 2008/2009.
John Loos, property sector strategist at FNB Commercial Property Finance explains: ‘The pre-GFC economic and consumer environment justified a sharp rise in real retail property rentals and values. It was the “darling” property class, as one would expect in a consumer boom.
‘However, after a post-GFC decade of economic growth stagnation and gradually rising financial pressure on consumers, this property class has been due for a significant correction in its values, to better reflect economic fundamentals. And indeed, since around 2016, these values did start to broadly correct.’
According to TPN tenant payment performance data, retail property tenants were worse off than the office and industrial tenant populations during the 2020 hard lockdown.
The good news is that fewer tenants are now in arrears. However, Loos points out: ‘Despite having recovered to where 66% of tenants were in good standing with landlords regarding rental payments by July 2021, a massive improvement from 41% in May 2020, the level remained well below the 71% measured just prior to lockdowns commencing late in March of 2020.
‘In addition, by October 2021 the tenants in good standing percentage had receded slightly to 64%, suggesting that the last part of the full recovery may be the toughest part of the recovery, and the percentage remains below the 71% of the Industrial Market and 70% of the Office Market.’
Improvement in tenant performance 2022
However, FNB believes that there will be a further mild improvement in tenant performance in 2022. This is in part because of the effects of the 2020 recession fading.
Demand for coastal properties will still be high but elsewhere, landlords have been advised to invest in sustainable systems to reduce costs while ensuring there’s no reduction in access to water and energy.
Weak office market
Meanwhile the demand for office space remains weak. ‘Most of the rental demand is for small offices. If you look at what’s happened is that the rentals have been slashed – absolutely annihilated. It’s a lot cheaper to rent than buy even though interest rates are low but rising,’ says Chris Renecle the MD of Renprop.
Finding tenants that are willing to commit to long term leases is also difficult. ‘There’s generally the appetite is to not to buy but to do short two -year leases.’
He adds that the office market in Sandton is particularly depressed. ‘There was an oversupply before Covid, and it’s now made it worse. There is a 30% vacancy rate. There is a lot of vacant unlet space, but this is the case everywhere. There is a demand for sectional title purchase but at 60% of what it will cost to build but people are letting it go. But people like us who can afford to hang it on hold it as we put low rentals in bite the bullet.
WFH trend
Figures from FNB show that the office property class is expected to be the underperformer of the three major commercial property classes in 2022.
According to the South African Property Owners Association (Sapoa) by the second quarter of 2021 office vacancy rates increased to around 15% – it’s highest level since 2004. An often-cited reason behind the depressed office market is the work from home (WFH) trend that arose from the Covid-19 lockdowns.
While restrictions are easing and more employees are returning to the office this will not make too much of a difference as companies embrace a more hybrid way of working and “hotelling”, which refers to a desk booking system.
Loos adds: ‘The “Work from Home (WFH)” surge during the Covid-19 lockdown period features prominently in these space requirements revisions. However, job losses in the Finance, Real Estate and Business Services Sector may have also played a significant role.
Renecle believes that Covid-19 is not the only reason to blame for a depressed office market and suggests a change of leadership would have a better effect on the economy.
Renecle says: ‘The only thing that will make a difference if there’s a huge economic upturn is if the ANC get voted out. There is huge inflation and rising interest rate – there’s stagflation. Our economy is shrinking. Logistics and warehousing are doing well – they’re letting and selling but that’s because the lack of manufacture and more import and warehouse distribution.’
