After several years of humdrum returns, investors are making decent money again from bricks and mortar.
Figures released last week by investment research firm MSCI show that South African institutions and listed real estate investment trusts (Reits) earned an average 12.5% total return on their underlying shopping centre, office, industrial, hotel and residential building portfolios for the year to June. That’s the best achieved in a decade, well ahead of the 10-year average 8.3%.
The MSCI South Africa property index tracks the performance of the direct property portfolios worth R418bn, making it a highly regarded benchmark of the state of the market.
The industrial sector continued its multiyear outperformance with a 14.6% total return for the year to June, followed by retail at 12.5%, offices at 11.7% and residential at 11.5%.
The rebound in the long-suffering office market is particularly encouraging. In fact, in the six months to June, offices even pipped retail with a total return of 5.7% vs 5.2%. That’s the first time in a decade that has happened.
Eileen Andrew, MSCI’s vice-president of client coverage in South Africa, says the recovery in all property sectors has been underpinned by a reduction in vacant space, which has placed upward pressure on rentals.
Tenants and landlords
The index’s overall vacancy rate dropped to 5.2% in June, down from 6.7% a year earlier, and is now at its lowest level since December 2017 (see graph). At the same time, rentals increased by an inflation-beating 6.9%, up from 3.4% a year earlier, a welcome reversal of the picture in 2020-2021 when landlords had to cut rentals in a bid to keep tenants.
The rebound has been nowhere more evident than in the office market. Though its vacancy rate is far higher than other sectors at 13%, that’s down from a peak of nearly 19% in mid-2022.
However, Andrew points to a clear divergence between Joburg and Cape Town. The Mother City’s office vacancy rate is a mere 4%, while greater Joburg is near 18%. Similarly, Cape Town landlords achieved average rental growth of 7.5% on lease renewals in the year to June, while their Joburg counterparts had to reduce rentals by an average 2.4% over the same period.
Andrew notes that investors are willing to pay more for commercial bricks and mortar in Cape Town than in Joburg. In fact, a whopping 130% more. MSCI figures show that Cape Town office buyers forked out an average of R25,000/m2 in the year to June vs only R10,900 paid by their Joburg counterparts over the same period.
Still, there has been an encouraging decline in empty offices in Sandton over the past 6–12 months. The country’s largest commercial node, it had been hit hard by the adoption of remote working and semigration to the Western Cape.
The latest office survey by the South African Property Owners Association shows that in the four years to June the vacancy rate in Sandton dropped from nearly 20% to 14%.
While a large chunk of Sandton’s redundant office space has been removed from the market through office-to-residential conversions by major players such as Africrest Properties and BlackBrick, supply has also been kept in check by little, if any, new office development.
Crane-free relief
As Andrew König, CEO of Redefine Properties, one of the country’s largest office landlords, notes: “If you take a drive through Sandton, you see hardly any cranes.” He says that’s a good thing for the office market, as it means Sandton is unlikely to head for another oversupply of offices any time soon. König says there is already a shortage of larger boxes of premium office space (new, modern buildings with all the bells and whistles) in pockets of Sandton and Rosebank. “You won’t find office space if you’re looking for more than 5,000m² in Sandton at the moment,” he says, “which is a good sign of what is likely to happen to office rentals.”
Still, he concedes that crumbling infrastructure and municipal service delivery weigh increasingly on investor sentiment and have become key considerations in long-term capital allocation decisions, especially in Joburg.
“You can’t unbuild something that is already built. So we have to think carefully about how the surrounding infrastructure will affect our property investments over time.”
However, König says Joburg remains the backbone of the economy, and despite property owners having to maintain their own ecosystems for their buildings on top of what they pay the city council, “we can still make the numbers work in Joburg”.
