The industrial property market continues to defy the odds with low vacancies and strong rental growth, with the Cape Town area booming and other major industrial areas such as Durban, also showing robust growth.
These were the findings of the latest Rodes Report on the South African Property Market for the first quarter of 2024, released yesterday.
In Cape Town, nominal rentals of industrial space are booming, with the first-quarter 2024 figure up about 20% compared to 2019 that is before the pandemic. One of Rodes survey respondents said there is a severe shortage of industrial buildings and there have been rental wars because of multiple tenants looking to lease the same space.
The report said that another broker had commented that a tenant was secured for one Cape Town property after only one day of advertising, without the tenant even viewing the property.
Meanwhile, the office market continued to recover. House prices remained under pressure, while flat rentals were looking relatively better.
For listed property companies, a spectacular rally in share prices pulled back in March and April, as expectations of interest rate cuts have been dialled back, the Rodes report authors noted.
Another factor that held back some buyers was uncertainty about the outcome of the elections and the numerous problems faced by SA Inc. The world also was not as safe as before, given lower-than-usual economic growth risks and the geopolitical tensions.
The coming quarters will no doubt be a rough ride, considering the uncertainties about the elections and the direction of interest rates, the report said.
Rode found that the average national vacancy rate of grades A+, A and B office space combined in decentralised nodes was 13.9% in the first quarter, one percentage point better than the 14.9% average in the first quarter of 2023. This was based on the opinion of brokers active in nodes across the country.
Looking at the bigger picture, the national office vacancy rate was still well above the pre-Covid-level of 10.5% in 2019 and the historical long-term average of 9.3%, as per SAPOA (South African Property Owners Association) data.
Office vacancies were higher in Johannesburg and Pretoria, while Cape Town and Durban have performed comparatively better.
All in all, rentals have improved from the big Covid declines, but are still about 2% below 2019-levels. The market has been boosted by the return of some workers to offices since 2022, albeit in many instances in a hybrid way, the report said.
Office rentals declined sharply in real terms in all the major cities, which made most new developments unviable. Office building activity in the 12 months to February, 2024 declined by 43% compared to the 12 months to February, 2023.
For industrial space, nominal gross market rentals in South Africa for 500 square metres grew by 4.8% in the first quarter over the first quarter of 2023, and this was also up from roughly 4% recorded over 2023.
Industrial rentals in the first quarter were up about 15% compared to the pre-pandemic-levels of 2019. However, in real terms, rentals were still declining due to elevated building-cost inflation. Regionally, all the major conurbations shone with strong nominal rental growth (5% to 7%) and low vacancies. Logistics properties continued to feature ultra-low vacancy rates.
Nominal house prices grew by 0.8% over January and February, 2024 compared to the same period in 2023, based on FNB data. This implied that prices in real terms continued to fall significantly as the average consumer inflation (CPI) rate was 5.4%.
We still expect SA nominal house prices in 2024 to grow at a slower rate than 2023s average of 1.5% amid a weak economy and elevated interest rates, the report noted.
At the time of the last Rode Report in December, the market had been optimistic that interest rates in the US and in South Africa would decline several times in 2024.
In the report yesterday, Rode wrote: So far, no cuts in the US and locally have occurred due to sticky inflation, with many forecasts being pushed back to late in the year. When interest rates eventually do decline, the market would get some support, but do not expect fireworks. It is all about affordability.
