Commentary by John Loss, , Property Sector Strategist at FNB Commercial Property Finance.
The unchanged repo rate decision was as expected by FNB. This means that the SARB has kept interest rates unchanged since May 2023, after a prior 475 basis point hiking cycle staring late in 2021. Although CPI inflation is within the SARB’s 3-6% target range, at 5.6% it is near to the upper target limit, and has crept higher in recent months, so the SARB appears in no hurry to cut rates just yet. FNB expects mild interest rate cutting to commence in the 2nd half of 2024. Some potential property implications of today’s decision are as follows:
- Investor/Buying Market: For commercial property, while previously I had believed that the ongoing sideways movement in interest rates may prove mildly positive from a commercial property buying market point of view, I no longer expect this to be the case. I had expected some improved investor confidence earlier in the year, because rates were stable and there was a mounting expectation that the next interest rate move would be down. However, our FNB Property Broker Survey for the 1st quarter points to a mild weakening in broker confidence, which would to a significant degree reflect what they experience in the markets that they operate in. The survey suggests little in the way of improvement in the 1st half of the year at least, with pre-election concerns possibly playing some market subduing role. Therefore, it seems more likely that the combination of unchanged interest rates, ongoing economic weakness, pre-election investor caution and weak business confidence, will see the commercial property market remaining mediocre at best until the 2nd half of 2024. At that stage we could see some mild strengthening, given FNB’s expectation of interest rate cuts commencing after mid-year.
- Property Valuations: The ongoing sideways movement in interest rates is expected to keep property values growing at very low single-digit rates, not keeping pace with general inflation, which translates into further correction in “real” (inflation-adjusted) values.
- New Development Market: If the existing market is to move sideways at best, the new development market is likely to remain in the doldrums.
With ample supply in existing property markets, with the exception perhaps of industrial property, it would require strengthening demand for existing properties to run for some time before there is sufficient lack of supply to trigger meaningful demand growth for newly built properties, and that environment appears some way off.
- Commercial Rental Market: I do believe it is possible that we may see a mild rise in commercial property vacancy rates this year, after recent years of decline, in part as a result of the relatively high interest rates sustaining the financial pressure on the commercial tenant population in a weak economic environment. Notable property classes at risk of some rise in vacancy rates would be office and retail. Vacancy rate declining trends of recent years in office, retail and industrial are believed to be the lagged impact of the post-lockdown recovery out of 2020. It is possible now that we could see renewed pressure on rental space demand still to come in 2024, which would be the lagged impact of higher interest rates and renewed economic slowdown possibly stalling vacancy rate declines for a short period in 2024. We thus don’t expect further commercial vacancy rates decline until at least after interest rates are actually on their way down and the economy has picked more noticeably.
- Commercial Mortgage Advances: Given our belief that property buyer demand may remain mediocre, commercial mortgage lending growth looks set to remain weak, with commercial mortgage advances growth remaining in low single-digit territory.
