A closer look at long-term commercial property performance has revealed a significant multi-year cumulative correction says John Loos, Senior Economist at FNB Commercial Property Finance.

South Africa’s economic growth entered a prolonged period of stagnation from around 2012 following the post-Global Financial Crisis peak of 3.2% in 2011. Between 2020 and 2024, the economy averaged just 0.4% annual growth. While the pandemic lockdown disruption was an abnormal event, growth remained below 1% per annum in 2023 and 2024, he says. This persistent weakness can be attributed to SA’s many structural economic constraints.

“We contend that the commercial property market has corrected significantly in line with this weakness, but to appreciate the full extent, one must analyse the data correctly.”

MSCI’s annual data for 2024 showed an improvement in the All-Property Total Return (income return plus capital growth) – a surprise at a time when the economy recorded a second consecutive year of sub-1% real GDP growth. However, the 11.9% return in 2024, the first double-digit return since 2017, remains well below the 16% peak recorded in 2013.

“The commercial property market’s relative weakness becomes clearer when examining capital values and net operating income (NOI) in real (inflation-adjusted) terms,” he notes.

From around 2015/2016, the commercial property market began showing signs of broader weakness, believed to be a lagged response to the long-term stagnation in economic growth. On the surface, all-property net operating income grew by 33.5% between 2016 and 2024 with the average capital value per square metre rising by 27.7%. But these are nominal figures, says Loos. “Once we adjust for economy-wide inflation using the GDP deflator, the picture changes drastically. Real net operating income declined by -15.2% and real capital value per square metre declined by -18.9% over the same period – significant cumulative corrections.”

However, these real declines in income and capital value do not fully capture the extent of the commercial property market’s weakening. Loos says that a marked reduction in new commercial property development helped to prevent even more extreme declines. In 2024, the square meterage of commercial building plans passed was -30.6% lower than the multi-year high in 2016 and a massive -46.4% below the 2008 multi-decade peak.

Similarly, the square meterage of completed commercial property space in 2024 was -48.9% below the 2017 high and -62% below the 2008 peak. He further notes that 2024’s completion levels were lower than most of the 1990s – a period when the economy was significantly smaller, illustrating how subdued construction activity has become.

Looking ahead, he says that the recent series of interest rate cuts is expected to mildly strengthen market conditions in 2025 when compared to 2024. “However, a strong and sustained recovery will depend on achieving significantly improved economic growth.”

FNB Commercial Property Finance forecasts a modest improvement, with growth rising from 0.5% in 2024 to 1.1% in 2025, and reaching 1.9% by 2027. It also anticipates that interest rates will likely move sideways for a protracted period following one more expected 25-basis-point cut in the second half of 2025.

“While this expected mild improvement in the economic and interest rate environment is welcome, it may not be sufficient to support sustained real (inflation-adjusted) growth in property income and capital values through the forecast period to 2027,” he concludes.