Globally, economic and political uncertainty coupled with the lingering effects of the Covid-19 pandemic will continue to affect the performance of global real estate markets in years to come.
Rising inflation and interest rates in many markets have slowed investment levels, leasing and sales activity.
“Commercial real estate owners and investors will need to be strategic on decision-making whether constructing, consolidating or reallocating their property portfolios,” said professional services firm Deloitte.
According to the Deloitte Centre for Financial Services’ Real Estate Outlook Survey for 2023, many global CFOs are more cautious about operations within their businesses. They cited sustained high inflation as one of the top risks to financial performance in 2023.
Deloitte believes that record high inflation dynamics can push up or pull property fundamentals in all directions. As much as 48% of those surveyed expect to see declining revenues, with 33% planning to cut costs compared to only 6% in 2022 — highlighting the growing concerns for CFOs.
However, about 66% of survey respondents remain optimistic and expect the market to either improve or remain firm. Others, (57%) expect leasing activity to improve with reductions in vacancies and rental growth for some asset classes.
In SA, rising inflation and interest rates coupled with slow growth and ongoing load-shedding drove listed property to underperform in 2022, recording a return of -3.6% versus 6% from SA equities and 4% from SA bonds.
According to Rahgib Davids, an equity analyst at M&G Investments, companies with UK and European exposure fared worse than their local peers due to their higher starting valuations, which came down sharply amid the aggressive rate hikes.
“Uncertainty remains and we don’t know when inflation will ease and where interest rates will settle. SA’s economic growth is weak, unemployment levels remain high, and a deteriorating power supply is destructive for businesses,” said Davids.
Interest rates have been rising since November 2021, with the SA Reserve Bank raising the repo rate by 75 basis points to 7% in November — with the prime lending rate rising to 10.5%.
The Bank revised down its 2023 GDP growth forecast from 1.4% in September to 1.1%, with headline inflation expected at 5.4%, but slowing to 4.5% in 2024 and 2025. At the time, the Bank said increased load-shedding could deduct 0.6 percentage points from GDP growth in 2023. It will announce its next interest rate decision on January 26, with a further increase expected.
With 11 Eskom generators breaking down on Tuesday, electricity supply constraints have become so severe that the country is back at Stage 6 until further notice, according to the power utility’s media statement on Wednesday. At stage 6 of the rolling blackouts, the power can be off for as long as 11.5 hours a day.
Assets
Globally, office, industrial and retail are some of the most attractive risk-adjusted assets to buy in the next 12-18 months. The Deloitte survey shows that nearly 35% of respondents plan to invest in logistics and warehousing facilities.
Davids said SA’s retail sector, which enjoyed a strong post-pandemic recovery, will benefit from national retailers’ expansion plans. However, severe consumer strain dampens the prospects for near-term rental growth.
The industrial sector outperformed, mainly due to robust demand for logistics and warehousing facilities driven by retailer optimisation of supply chains and a growing SA import sector. It will continue to perform well as long as demand outstrips supply.
“SA’s office sector remains oversupplied with corporates rationalising their space needs as they adapt to work-from-home policies,” said Davids.
Office tenants no longer lease just a building — they want amenities such as cafes, relaxation areas and break-away areas. “Space as a service will gain further momentum in 2023 as landlords become innovative to attract and retain tenants,” said John Jack, CEO of Galetti Commercial Real Estate.
According to Deloitte, tenant expectations have changed along with space usage. Savvy landlords will need relevant data to understand the changing tenant dynamics and how to capitalise on this. “With rising rentals in some markets, tenants look for quality and efficient buildings to match high premiums.”
Calvin Crick, MD for transaction services at Cushman & Wakefield | Broll, said with oversupply and high vacancies, the office market is characterised by flight to quality. Premium buildings considered top drawer offering various amenities continue to attract tenants countrywide and, in some instances, command high rentals.
Uncertainty will remain in the near term. “The global real estate industry faces transformational shifts in how buildings are used, valued and transacted,” said Deloitte.
It said the “business as usual” approach is no longer relevant. Property owners need to be innovative to meet the changing needs of investors, tenants and regulators, and unlock asset value through strategic partnerships and enhanced data capabilities.
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