SA’s commercial property sector demonstrated resilience and growth amid ongoing economic pressures according to the latest SAPOA Property Trends and Operating Costs Report for June 2024.

The report, compiled by MSCI South Africa, highlights a 10.1% annual total return for the sector with a six-month performance of 5.3%. However, despite positive capital growth seen across the sectors, rising operational costs continue to pose challenges for property owners.

“The data reveals a complex but ultimately encouraging landscape,” said Eileen Andrew, Vice President of MSCI, during a recent webinar on the report’s findings. “Despite cost pressures, South Africa’s property market continues to show resilience, particularly in sectors like industrial and residential, which are leading recovery efforts. Our findings emphasise the importance of sustainable practices to manage costs, especially as electricity remains a significant expense.”

Industrial assets emerged as the top performer, boasting the highest returns across all property types. As demand grew and rental rates strengthened, industrial spaces solidified their position as a cornerstone of growth within the local property landscape.

The residential property market, meanwhile, recorded robust returns as the sector benefited from strong rental growth and declining vacancy rates. Notably, this improvement reflects an increasing demand for residential space. As a result, residential properties posted steady income returns, providing property owners with a stable source of revenue.

“The performance of the industrial and residential property segments is a promising indicator for South Africa’s property landscape,” she noted. “Yet, as the report shows, the sector must also adapt to rising operational costs, particularly in energy, to sustain its momentum. As an industry, we must continue to collaborate to find sustainable solutions and drive efficiency.”

Operating expenses increased by 4.6% during the year to June 2024, driven primarily by rising electricity rates and increased tenant installation costs. The sector’s cost-to-income ratio, while steady compared to the previous year, remains higher than pre-Covid-19 levels, underscoring the ongoing financial pressures faced by property owners. Notably, industrial properties, which saw the fastest growth in costs, highlighted the importance of energy efficiency improvements across property segments. For office and retail properties, administered costs showed slight decreases, although industrial properties recorded a rise in these costs, with KwaZulu-Natal experiencing the highest increase.

“In an era of high energy costs, implementing energy-efficient solutions is crucial for maintaining profitability and supporting sector-wide stability,” said Andrew.

Positive trends were also seen in investor activity, with REITs recording net acquisitions for the first time in six years—a sign of renewed confidence. This trend, bolstered by improving GDP and a global shift towards real estate as a stable asset class, bodes well for continued investment. Growth in base rentals, particularly within the retail, industrial, and residential segments, further supports the sector’s post-pandemic recovery. For residential properties, increased rental demand alongside a more favourable supply-demand balance has led to improved occupancy rates, underscoring its potential as a strong, stable investment.

The report also emphasises the importance of balancing rising costs with strategic growth initiatives. For example, while operating costs are largely in line with inflation, electricity costs continue to increase disproportionately, placing additional strain on property owners. Total costs of occupation for tenants grew by 3.5% in the past year, below inflation, signalling some relief for tenants but also suggesting a need for cautious optimism as owners absorb a larger share of the cost burden. The report underscores the resilience required within the sector as property owners look to manage costs while maintaining growth trajectories.