Commercial property sector doing its best to recover, but the rate hike will not help

There may be a slowdown in sales activity in the commercial property sector in the second half of 2022. Photo: Michael Gaida/Pixabay

There may be a slowdown in sales activity in the commercial property sector in the second half of 2022. Photo: Michael Gaida/Pixabay

Published May 20, 2022


Just as the commercial property sector was starting to claw its way back from the challenges provided by two years of lockdowns, yesterday’s 0.5% interest rate hike came along to push them back down again.

The only sector which may reap the benefits of higher rates is the residential rental sector.

After three hikes of 0.25% at previous Monetary Policy Committee (MPC) meetings, FNB commercial property economist John Loos says yesterday’s hike “leads us to expect that we may see some renewed slowdown in sales activity in the commercial property sector in the second half of 2022”.

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In addition, recent declines in vacancy rates may stall on the back of weaker demand for new commercial space.

“We also expect this ongoing rate hiking to keep average commercial property capital value growth at low single digits, translating into negative growth in real (inflation-adjusted) terms.

KZN particularly hard-hit

Recent floods in KwaZulu-Natal have made the road to recovery difficult in many ways, explains Malusi Mthuli, KZN provincial head at FNB commercial property, adding that the focus by municipalities has now been redirected towards the loss of life and social priorities as opposed to rebuilding the province.

He unpacks some of the impact and silver lining following the recent floods and unrest on the property sector:

– The business disruption experienced by the commercial property sector through the unrest and floods is immeasurable. The process to rebuild the commercial sector to what it was before the July 2021 unrest is still not complete and the recent floods have stalled it a little longer.

“Both the tenants and landlords have suffered a great deal of financial loss. Landlords have a better chance of recovery, but some businesses will, unfortunately, be gone for good.”

– The businesses that survived have a different outlook of the economy and trading environment, as a result, their space requirements might change. But there is a silver lining as disruption of the Durban harbour will have a positive spin-off to other harbour towns like Cape Town, Gqeberha, and East London and properties that surround these harbours.

– KZN’s warehousing, and logistics inclined property will attract more demand. They are likely to experience an increase in rentals and lower vacancy as a direct consequence of reduced supply of space and increased storage periods.

“Overall, properties that survived both the unrest and floods will attain a competitive advantage in the market. Challenges in the office space are largely a direct consequence of the Covid-19 pandemic and the restructure of the working environment towards working from home. The office market remains subdued, but office-to-residential conversions offer attractive alternatives to these challenges,” Mthuli says.

Good news for home rentals

Loos adds, however, that the residential rental market “may continue some moderate strengthening”, explaining that this component of the market typically benefits from moderate interest rate hiking.

“This is because a portion of aspirant home buyers choose to delay their purchase and take up rental space instead.”

Tony Clarke, Managing Director of the Rawson Property Group, says the rate hikes could also result in an increase in urgent and/or distressed property sales, and that this, together with the general perception of a less favourable property finance landscape, could see some expansion of the rental market’s tenant pool.

However, this is unlikely to be significant enough to impact rental growth immediately.

“Realistically, we’re not expecting amazing improvements to rental or house price growth in the short term, apart from a few high-demand pockets. That said, it’s far too early for existing homeowners or property investors to panic over the value of their property assets. Short-term market fluctuations are normal. In the long term, property remains a highly performant asset class.”

With that in mind, Clarke says current conditions could provide excellent opportunities for buyers with a long-term view on growth potential.

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