Interest rate cut may bolster commercial real estate sector
July 23, 2019

 

Earlier this month the South African Reserve Bank announced that it will cut interest rates to boost the country’s flagging economy. The new was welcomed by the commercial property sector and in this blog post our CEO, John Jack, shares his thoughts on what this means for the market.

The rate cut by 25 basis points to 6.5% is good stimulus for the commercial property sector but we also need to see real GDP growth to halt the rising vacancy trend.

More money in property owner’s pocket

The rate cut by the Monetary Policy Committee reduces the cost of debt giving landlords the ability to service more debt or appropriate rental income to paying down the bond - or in the case of no income, the reduced interest rate causes less of a hole in the income statement. Everyone welcomes a lower bond repayment when incomes are under pressure.

Office vacancies under pressure

Although the cut is welcomed news, the office sector is still experiencing high vacancies and it may be some time before we see any impact of today’s MPC decision. According to the South African Property Owners Association, the national office vacancy rate is in the double digits at around 11%.

Earlier this year, global company MSCI released figures showing that the national office vacancy rate for the last quarter of 2018 was 12.6%. Broken up into Office CBD and Office decentralized nodes, their figures showed vacancy rates of 16.9% and 11.2% respectively. We have seen vacancies increase across the board, most significantly in the office sector and rentals are under pressure, and in certain circumstances reversions are close to 30% reduction in rentals. Oversupply in certain nodes, such as Midrand and Sandton, is partly to blame. The current trend towards co-working office spaces is mooted to have a positive impact on reducing office vacancies. The key to overall vacancy reduction is seeing growth in the economy.

Increased levels of debt

Occupiers who are seeing increased debt levels in relation to their market cap may require refinancing at higher levels and we believe that this rate cut will allow them to re-base their position. Reductions in bond repayments allows landlords to reduce the required rental, perhaps to a level that would entice an occupier to relocate to their building.

We believe that a lot of focus is being put into attracting talent within the office sector. The better the building and better the position, ultimately the better staff you will be able to attract to your business.