South Africa’s listed property is back on investor’s radars as the best performer of the different asset classes during the first half of 2024, according to Rode’s State of the Property Market for Q2 2024, with optimism about the Government of National Unity (GNU) reflecting in share prices of listed property funds.

The formation of the GNU, reduced load shedding, and expectations of lower interest rates have led some economists (like the BER at Stellenbosch University) to upgrade their views on economic growth for 2025 to around 2% – an improvement on the approximate 1% expected during 2024. This implies a more favorable medium-term outlook for the property market.

Office

The modest recovery of the office market continued during Q2 2024 as evidenced by lower vacancy rates and slowly growing nominal market rentals. The sector has been boosted by the return of some workers to offices since 2022 albeit mostly in a hybrid way.

Rode found that the average South African vacancy rate of grades A+, A, and B office space, combined in decentralised nodes, was 13.1% in Q2 2024, down from 13.9% in Q1. This was also lower than the 14.6% average of Q2 2023.

Looking at the big picture, the vacancy rate is still well above the pre-Covid-19 level of 10.5% in 2019 and the historical long-term average of 9.4% (as per SAPOA’s data).

Decentralised vacancy rates of coastal cities Cape Town and Durban improved further during the period as the lowest of the major cities. However, vacancy rates were comparatively higher in Johannesburg but have also seen a strong improvement over the past few quarters. During Q2 2024, weighted gross market rentals for decentralised grade A space increased nationally by 2% in nominal terms compared to Q2 2023, somewhat better than the 1% growth recorded in Q1 2024. Overall, rentals have improved but are still approximately 1% below pre-pandemic levels.

Durban is the surprise story for the quarter with the fastest growth in decentralised nominal market rentals of +6.2%. Elsewhere, Cape Town continues to perform strongly with decentralised rental growth of about 5%. In Johannesburg (+0.8%) and Pretoria (+1.5%), nominal decentralised growth remains weak.

Listed property companies are still generally reporting negative office rental reversion rates as contractual rentals have escalated over the past few years by much more than the growth rate of market rentals. This implies that office rentals are still declining in real terms after deducting building-cost inflation (BER BCI) of around 9%, which makes most new developments unviable.

While office building is stagnant, there is an enormous upside rental potential in the medium term.

Industrial

The industrial property sector continues to boast sharp nominal rental growth amid continued low vacancy rates, benefitting from less speculative development than office buildings and shopping centres.

Nominal gross market rentals in SA for industrial space of 500m2 grew by 6.1% year-on-year during Q2 2024, up from the 4.8% growth recorded in Q1 2024. Rentals were approximately 20% higher compared to pre-pandemic levels of 2019.

Rentals of industrial space of 1 000m2 grew by a similar rate (+6.2%) in Q2 2024 however, in real terms, rentals are still declining due to elevated building-construction inflation.

Regionally, all major conurbations shown with strong nominal market rental growth (4% to 9%) and low vacancies. Central Witwatersrand (+9.2%) and the East Rand (+6.8%) saw the fastest rental growth with Cape Town’s rental growth cooling to 4.9%. National stand values did not perform as well as rentals.

Residential

House prices are still growing at less inflation amid a weak economy and elevated interest rates.

Nominal house prices grew by 0.4% during Q2 2024 compared to Q2 2023, based on FNB data. This implies that prices (in real terms) have continued to fall significantly after deducting inflation.

Regionally, houses sold the quickest in the Western Cape with Gauteng at the opposite end of the spectrum.

Rode anticipates house price growth to remain under pressure over the next few months with cautious optimism about prospects for 2025.

On a national level, vacancy rates of apartments averaged 6.7%, down from 7.9% in Q1 2024 according to Rode’s residential survey data. Vacancy rates are now below the 2023 level of 7.2%.

Regionally, the Western Cape continues to stand out with its low flat vacancy rate of 2.7%, well below the national average. Gauteng’s apartment vacancy rate declined significantly to 6.5% from 9.3% in Q1 2024, due to lower vacancies in Johannesburg and Pretoria.

Gauteng’s apartments rentals grew by 2% year-on-year in the first quarter based on Stats SA data. The data suggests that property owners have generally kept rental levels in control to keep properties tenanted. Official data from Stats SA shows that in Q1 2024, nominal apartment rentals in South Africa increased by 3.6% compared to a year earlier. This implies that house prices and rentals are still declining in real terms.