Last week, the South African Reserve Bank (SARB) announced a cut in the repo rate by 25 basis points, changing the prime lending rate to 9.75%. While this cut has been widely welcomed by commercial property owners, John Jack, CEO of Galetti Corporate Real Estate believes that the cut is smaller than one would have hoped for.
Commercial Real Estate Sector Remains Under Pressure
As the country gears up for another year of slow economic growth, John notes a significant decline in the office sector over the past 18 months as pressure mounts to fill stagnant vacancies. “The industry has been under major pressure with many companies downscaling or opting to renew rather than relocate. In addition, landlord incentives to attract and retain tenants had the industry battling it out and losing significant margins. We saw companies renewing rentals at 20 – 30% discounts”.
South Africa’s GDP forecast for 2020 and 2021 by the SARB has decreased from 1.4% to 1.2% and 1.7% to 1.6% respectively. The World Bank projects a 0.9% growth rate which is still too low to generate much-needed employment opportunities.
“We’ve seen prominent companies such as Walmart and Telkom shedding jobs around the country and this trend is set to continue for the foreseeable future – particularly in the FMCG sector where goods can trade easily online,” says John.
“Electricity supply constraints are also likely to keep economic activity muted in the near term”.
Things Are However Looking Up
John does however believe that the industry will start to recoup its losses in 2020. “While some say that the private sector is on an investment strike, this is simply not true. We’ve started seeing really promising private-sector investment in commercial property towards the end of last year and this trend is set to continue”.
Contrary to the economic forecasts for 2020, we have seen a significant increase in decision making by occupiers at the start of the year which bodes well for Q1 results for the business.
“The rate cuts will likely be absorbed into occupier budgets as they look for ways to reduce overheads and won’t significantly stimulate the economy, a larger cut might have seen some immediate result,” he explains.
John also notes that mixed use buildings are on the rise and that many investment opportunities exist in this space for both local and foreign investors. “Many people, particularly millennials, are now opting to live, work and play in one convenient location”.
To conclude, John says that planning ahead and taking a long-term approach to investments is key. “Companies with a good balance sheet are looking for opportunistic buys and adopting a five-year strategy will help in securing the right deal.”