Rising municipal rates and escalating electricity tariffs, coupled with a decline in service delivery, are prompting homeowners to seek refuge in areas where infrastructure remains intact.
The Western Cape is poised to benefit from this trend, as highlighted in FNB's 2024 property insights analysis by John Loos, a property strategist in the commercial property finance department.
The report paints a cautiously optimistic picture for a "mildly improved" economic environment in 2024, potentially yielding better results for the commercial property market.
However, Loos anticipates that the positive effects may only materialize in 2025. Property investment could see improvement in 2024 due to various economic factors such as interest rate cuts and lower inflation, providing investors with a potentially better year, although tangible improvements may only manifest in 2025 due to economic cycles and uncertainties.
Key Predictions:
Municipal and utilities service reliability will be a critical theme for the commercial property market in 2024. Despite an anticipated improvement in electricity supply, people are likely to relocate to areas with efficient services, leading to semigration for household and business activities. The Western Cape is expected to be a major beneficiary of this semigration trend.
FNB foresees the continuation of the relative performances of major commercial property classes in 2024, with industrial property expected to outperform, retail in the middle, and the office market remaining the weakest, despite a recent decline in vacancy rates.
Economic Influences:
Loos predicts a slight improvement in economic growth from 0.8% in 2023 to 1.2% in 2024. The Consumer Price Index (CPI) is expected to drop from 5.9% in 2023 to 5.2% in 2024.
While interest rate cuts are not anticipated in the near term, a mild reduction of 75 basis points is predicted in the second half of the year, bringing the prime rate from 11.75% to 11%.
South Africa's Commercial Property Outlook:
After a significant interest rate hike cycle in 2023, credit-driven property buying and sales activity is expected to recover in 2024. However, the demand for rental space in commercial property may take longer to improve.
The commercial property market, particularly the rental market component, experienced setbacks during the 2020 Covid lockdown, but there has been a slight improvement since then.
The Property Vacancy Rate is expected to show a small increase in 2024, potentially influenced by delayed financial impacts on tenants from the 2021-2023 interest rate hikes and slower economic growth in 2021.
Loos anticipates a continued "correction" in real commercial property values in 2024, where capital growth may not keep pace with inflation, resulting in a decline in real terms.
This decline is attributed to stagnant economic growth unable to support positive real net operating income growth over the past decade.
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