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Unchanged rates decision expected to be mildly positive for commercial property and mortgage demand

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 starting late 2021. Although CPI inflation is back within the SARB’s 3-6% target range, at 5.1% it remains nearer to the upper target limit, so the SARB is in no hurry to cut rates just yet. Some potential property impacts of the decision are as follows:

  • Investor/Buying Market: For commercial property, we believe that the ongoing sideways movement in interest rates may prove mildly positive from a commercial property buying market point of view. This may sound strange at first, because the cost of servicing debt is not changing yet. However, we believe that the confidence may have been boosted merely by interest rates not rising anymore, and because a shift from rising to sideways movement in rates has probably contributed to a widespread expectation that the next rate move may be down. Indeed, FNB expects mild rate cutting to commence in the 2nd half of 2024.
  • New Development Market: While the ongoing sideways movement in interest rates may support a mild increase in property investor confidence, and thus property demand, it is probably too early to expect any noticeable strengthening in the depressed new property development market at this point. With amply supply in existing property markets, we would expect strengthening demand for existing properties to need to run for some time before there is sufficient lack of supply to trigger meaningful demand growth for newly built properties.
  • Commercial Rental Market: While we expect buyer demand for commercial property to strengthen mildly as the year progresses and interest rate cutting approaches, our view is that  2024 will not see further vacancy rate declines across the board. The commercial property tenant population may still be under heightened pressure from interest rate hiking from 2021 to 2023. Therefore, rental space demand growth may be subdued in 2024, only strengthening again with a bit more of a lag to key economic trend changes. Therefore, 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, with some renewed pressure on the rental space demand still possibly to come in 2024, possibly stalling vacancy rate declines for a short period in 2024. We thus don’t expect further commercial vacancy rate 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 strengthen in part due to these sideways movement in interest rates and with rate cutting expectation growing, commercial mortgage lending may accelerate mildly in the coming months.
  • Property Business Confidence: While our FNB Property Broker Business Confidence Survey question has pointed to rising broker business confidence since interest rates stopped rising, the confidence level remains mediocre. It must be noted that there have been some other drivers of confidence improvement, notably a decline in load shedding levels since earlier last year. Nevertheless, we do believe that sideways movement in interest rates, after prior quire severe rate hiking, should have some positive impact on this confidence.
  • Capitalisation Rates and Property Valuations: While longer term deterioration in SA government finances has contributed to a long term rise in long bond and thus property capitalisation rate yields, it is possible that sideways movement in short term interest rates with growing rate cut expectations, as inflationary pressures subside, may cause the multi-year upward drift in capitalisation rates to stall in 2024, in turn supporting property values mildly after recent years seeing significant decline in values.
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