Categories: SA Valuer Blog1071 words4.1 min read

What’s in store for Property in 2023? | Patrick O’Connell


March 13, 2023


At the time of inditing this blog, it is end February 2023 in the midst of South Africa’s summer – 35 months on from when Covid 19 hit the South African and Global shores and wreaked havoc in many economies worldwide; emerging and established economies were not spared the effects of the C-19 Lockdowns.  Let’s have a look at where we are now and what is anticipated to unfold in the short to medium term.

As a recap, C-19 came, created chaos and went – however this has not quite stopped it from still creating damage across all world economies.

When C-19 hit, I made the statement that this was a Black Swan and that we would not see another Black Swan again soon, but rather Black Goslings for the medium term – this is the environment we are presently in.

Post C-19 and its varying lockdown periods, in SA we experienced the hasty return of a consumer with “brass in pocket” and there was a resurgence of retail spending.  The Retail Sector started to report sales numbers trending nicely to pre-Covid levels; the Office Sector saw green shoots appearing within the “new way of working” sphere; the Industrial Sector continued on its way, with limited effect from the C-19 Pandemic together with the upshot of online retail and the subsequent demand for logistics warehousing.  On the Residential front, interest rates were low and the buy-to-let market experienced increased vacancies as Lessees opted to purchase property based on the affordability of a mortgage bond due to a low interest rate environment. Happy Days ……. Not!!  The black goslings had been hatched.

Roll on the start of 2022 and Russia decided to have a fight with the Ukraine.  Not long after this, markets began to rally, and the Oil Price started its upward trajectory.  In SA, the impact was immediately felt in petrol prices at the pumps and soon we began to experience increases in our Inflation Rate, much like the rest of the world.  Oil was not the only culprit here, with China being offline with continued C-19 restrictions, worldwide supply chain disruptions continued, and we reached one of those macro-economic stages where demand exceeded supply; a run on prices followed, further impacting local and global inflation rates negatively.  During this phase, the All-Property sector trundled along with some green shoots here and there, but not enough to create fireworks.  There were some improvements to Vacancy Rates during 2022, Cap Rates were not too dramatically affected, and we saw positive, albeit rather small, rental reversions taking place; residential stock traded well.  Then another black gosling hatched.

Enter the ANC elective conference in December 2022 and the onset of a severely damaged Eskom with consequential heightened black-outs, together with an increasing inflation rate and increasing interest rates – a witch’s brew of the poorest quality.  Business confidence waned pending the outcome of the governing party elective conference whilst the Eskom conundrum impacted it negatively even further. This political and economic instability did not do us any favours at all; however, across the ocean things were not much better.  Europe, the UK and the USA also experienced heightened inflation rates and consequently also increased interest rates to levels last seen decades ago; those far cleverer than me started forecasting a worldwide recessionary environment for 2023.

Eventually China started to come out of their C-19 lockdowns with a much-anticipated improvement in the ever-present supply chain disruptions environment.  Subsequent to this, those in the know have been forecasting that the opening up of the China economy may very well soften the impact of a worldwide recession – this waits to be seen.  In SA at the commencement of the 2023 calendar year we were greeted with yet another increase in our Repo Rate, however this time only a 25 basis points increase – a move I strongly believe will see us levelling out at the top of our inflation and interest rate run. The next gosling is hatched.

There are numerous negative reports coming out regarding the 2023 calendar year given the ongoing Russia/Ukraine scrap, high inflation, high interest rates and the ever-present woes of Eskom.  In addition, our ongoing political and economic instability are still front and foremost in the mind of Business confidence, which is still coming in low. What is the outlook for us and the SA All-Property Sector for 2023 then?

So now we have a number of black goslings swimming around and creating a challenging environment for South Africa and the world at large.  I do believe that we are at the top of our interest rate hiking cycle; we shall see our inflation rate remaining stubbornly high for the short term linked with a sustained high interest rate environment, and Consumers stretched to their limits financially.  The Eskom woes will see businesses experience difficult financial performance on the back of higher input costs thereby squeezing margin, which we are already experiencing.

From a property perspective, I anticipate the following for the 2023 FY:

  1. I expect rental reversions to come sharply back into the spotlight this year as tenants grapple with increased Cost of Occupancy ratios, as a direct consequence of the Eskom woes which will compel Landlords to invest large financial sums to keep the lights on for their tenants.
  2. The high cost of utilities will remain front and foremost in the minds of commercial property asset managers as Operating Costs grow at a rate higher than what income streams are anticipated to grow at.
  3. Retailers will see Gross Profit margins coming under pressure as a consequence of a financially stretched Consumer. Whilst we did see good numbers presented in terms of Trading Density upticks for the period Q4:2022, the real effect to consumers will be felt through the first 2 quarters of 2023 where I anticipate the gains made to claw back somewhat.
  4. The office sector will continue its subdued performance for the 2023 period as there is still so much available vacant space which has to be filled – supply exceeds demand.
  5. The industrial sector is still positioned to perform well – this will significantly be underpinned by higher demand for high-tech logistics and distribution facilities. This could even be the Jewel in the Crown of the commercial property sector were it not for our infrastructure deficiencies in South Africa.

In summary then, with the number of Black Goslings still swimmingly well, we will experience a tougher 2023 where I expect the commercial property sector to manage along somewhat subdued, but certainly not losing any asset value ground.