Market & Forecast
The property market is facing some challenges currently with the SA consumer under pressure in the first and second quarter of 2014.
This is due to a rise in unemployment, unsecured lending reaching capacity limits, exchange rate weakness and rising fuel costs. Even food retailing which has been particularly resilient has tapered off a bit since December 2013.
Retail sales hit a sixth month low in March confirming economic activity moderated in the 1st quarter. Mining production fell 4.7% which was a significant contributor.
These problems have been exacerbated by the fact that SA does not have power capacity for new fixed investment projects and we understand that there is a back log of exciting projects, like the Samsung deal for Durban, which are all awaiting introduction of new power capacity.
It is our prediction that the introduction of electricity capacity to unlock these projects will co-inside with decreasing interest rates, an improving world economy and it will therefore lead to a more robust economic period from 2015 to 2020.
One needs to make a special mention of the office market in Durban which is significantly overtraded and rentals have declined notably due to this over supply. The oversupply is fairly inexplicable as developers continue to produce more space on risk with little hope of meaningful take up.
In fact most of the take up in the new space is really “musical chairs” with the newer space being massively attractive against the older space due to the relatively low rentals being offered. The older space is therefore suffering the most with large vacancies being created by the relocation of tenants to newer nodes like Ridgeside.
Another interesting point that may be affecting the office market is what Erik Brynjolfsson and Andrew McAfee are calling The Second Machine Age, where office employees are losing their jobs on a massive scale to brilliant technologies and software development. How much this is actually playing out in SA right now and contributing to office vacancies we are not sure of but it is certainly something to watch in the future.
The industrial sector which has been the most resilient is also showing signs of a softening economy but nevertheless it still remains relatively strong with few vacancies and the current only notable effect being a levelling off of rental escalation growth. Certain nodes like Jacobs, Mobeni around the new proposed dug out port are showing some promise.
The retail sector has been pretty stable too with a slight softening being noted in the last two quarters which is to be expected under current market conditions. This will remain as such until this trend of rising interest rates peaks and then turns down again. In this regard we are factoring in a 2% increase in interest rates over the next 12 months. We do not expect any more than this as the 0.5% is already having notable effect and with the economy being as soft as it is it is not going to take much of an increase in interest rates to quell the inflation pressures.
All of what has been mentioned above indicates a "buyers’ market" and represents an opportunity to buy properties at more reasonable prices. This is however proving somewhat difficult at the moment due to a shortage of sale stock at prices which constitute good value.
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