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What the GNU could mean for South Africa’s commercial property sector

30 Jul 2024

The early impact of the Government of National Unity (GNU) on South Africa’s key industries cannot be underestimated. The initial vote of confidence could bode well for the commercial-property sector as it continues its slow resurgence but has since been met with mixed reactions.

Source: Supplied. Simon Wilkins, managing director, advisory for Galetti Corporate Real Estate.

The latest Rode Report (2024:2) cited that the share prices of listed property funds rounded out the second quarter of 2024 with renewed optimism following the formation of the GNU and the impending interest-rate cuts.

“Investor sentiment is wholly positive but there are clear obstacles for the GNU, as the ANC and the DA learn to work together to find common ground,” says Simon Wilkins, managing director, advisory for Galetti Corporate Real Estate.

Wilkins adds that while South Africa weathers the political climate, recent market movements indicate an optimistic outlook. “The rand strengthened ahead of key events, such as the swearing-in ceremony of ministers, and it continues to make gains on the dollar. South Africa’s REITS (Real Estate Investment Trusts) are also performing well - up by 15% over 12 months – a key indicator of a strengthening market environment.”

Following positive developments, July marked yet another interest-rate hold by the Monetary Policy Committee (MPC), but Wilkins believes September’s announcement will paint a different picture for the sector.

“While the rate hold is not ideal in a sector where monthly repayments can equate to hundreds of thousands of rands and much relief is needed, the future looks brighter with inflation dropping slightly and petrol decreasing - two of the big indicators that dictate the MPC’s next move.”

Based on this, Wilkins believes that we could see a rate cut as early as September 2024. “While in the past South Africa would follow the lead of the US Federal Reserve, political turbulence in the US - combined with positive performance locally - could encourage the MPC to make some decisions of its own.”

GNU's impact on sectors

While he acknowledges that macroeconomic activity generally has direct impact on the commercial property sector, the GNU might be the biggest driver that the sector has experienced in a long time.

“The GNU impacts the rand, investor confidence and the subsequent rising and lowering of interest rates – crucial factors driving activity across every commercial asset class,” he comments.

Wilkins unpacks the potential impact of the GNU and the current performance per asset class as follows:

The office sector: Fast-forward to four years since the Covid-19 pandemic began and the industry is still filled with mixed feelings.

“The latest FNB Commercial Property Broker Survey (Q2 ’24) highlighted mixed activity levels and a market in flux. However, as investor appetites increase, so does the growth of the economy and with that comes more jobs as companies enjoy renewed confidence and subsequently, more business,” comments Wilkins.

The Rode Report (2024:2) revealed that recovery of the office market continued in the second quarter of 2024, noting that the decentralised vacancy rates of the coastal cities of Cape Town and Durban improved further during the second quarter and were the lowest of the major cities.

Not expected is Q2 ‘24’s frontrunner, Durban, which saw the most surprising turn for the quarter - up by +6,2% - in the city growing the fastest of the country’s four major cities.

“Cape Town continued to perform with a decentralised rental growth at about 5%,” says Wilkins. “In addition, we are also seeing strong growth in the likes of Menlyn, Century City and Umhlanga – key business districts that have undergone significant face lifts over the years.

Looking at what’s to come, Wilkins says: “We hope that the GNU formation combined with impending interest-rate cuts will continue to drive market activity – particularly in Gauteng where rentals have regressed.”

The industrial sector: Industrial properties continue to enjoy sustained demand – with sharp nominal rental growth amid subdued vacancy rates.

Wilkins explains that according to the Rode Report (2024:2), all the major conurbations showed strong nominal market rental growth between 4% to 9% and low vacancies, with the Witwatersrand (+9,3%) and East Rand (+6,8%) outpacing the rest.

“The industrial sector has proved to be an unwavering investment – even in some of the toughest times. And while all key regions have reported growth figures year-on-year, finding an investment that is ideally located near to major transport networks and meets tenant’s requirements in this high-volume sector is key,” he adds.

Wilkins has also noted a trend towards the disposing of key industrial assets via auction by owners. “Property owners recognise the impact of the industrial boom and are using auction as a platform to generate competitive bids.”

Looking ahead, Wilkins believes that the GNU will only strengthen the industrial sector’s value proposition. “We need to remember that when South Africa is performing, the rest of the world is taking note. Manufacturing in South Africa (compared to the likes of the US, Australia and Europe) is significantly cheaper so as the markets improve, so will demand for manufacturing and logistics space in South Africa."

The retail sector: Despite a ‘cash strapped economy’, the retail sector continues to perform – and Wilkins believes that this is set to continue, once again citing the most recent Rode Report, which noted that the outlook for the retail property market has improved - given the better prospects for consumer spending.

“Findings by the Financial Sector Outlook Study indicate that more than 50% of South Africans making use of credit are in fact over-indebted. However, the reality is that in a big ‘spend’ culture retailers will continue to perform well in South Africa.”

Interestingly, the cash market is also making news headlines with one of South Africa’s flagship retailers Mr Price reporting that almost 90% of its sales for the 2024 year were in fact cash transactions. “The cash culture is in fact huge and is often overlooked,” says Wilkins.

“There is big demand for strip malls and mixed-use developments which prioritise access and efficiency,” says Wikins. “One of the other notable trends in the retail sector is that of cash retail which has proved to be resilient - regardless of the political and economic climate and we expect this to continue as the economy starts to show slow signs of improvement under the GNU.”

Looking ahead, Wilkins believes that while it’s still early days, the formation of the GNU is the silver lining that the country needed. “Overall the GNU is good news for the commercial property sector.

“It marks the changing of the times and will ensure more accountability and transparency in government,” he concludes.