The latest 50 basis point hike in the repo rate on its own is likely to have a limited dampening impact on the commercial property market. However, it brings the cumulative interest rate hiking in the current cycle to 475 basis points since late-2021, and that amount of interest rate hiking is very significant, says John Loos, property strategist at FNB Commercial Property Finance.
“Much of the cooling impact of earlier rate hiking has yet to affect the commercial property market. The full impact of all the interest rate hiking will feed into the market during the course of 2023, slowing demand for commercial property financed by mortgage borrowing.”
Late in 2022 and early in 2023, FNB’s Property broker surveys suggested that property sales activity may be starting to slow down. Loos believes there are more challenges to come in 2023, and this will feed into slower new commercial property mortgage lending.
Economy slowing down
In addition to a global economic slowdown and interest rate hiking, the South African economy has had increasing load shedding to deal with since late 2022. In March 2023, the amount of electricity produced declined by -4.5% year-on-year - following a monthly year-on-year decline since the second half of 2021.
“This environment makes it difficult to achieve economic growth, and that’s not taking into account the additional cost of electricity solutions required by businesses and property owners to alleviate erratic supply,” says Loos.
FNB’s real Gross Domestic Product (GDP) forecast is for significantly slower growth in 2023. After 2% growth in 2022, the growth rate is forecast to slow down to 0.1% in 2023. This is because of a global economic slowdown affecting South Africa’s trade, higher domestic interest rates curbing domestic demand growth, and an assumption that significant load shedding will continue through the year.
Real GDP growth had already dipped into negative territory in the final quarter of 2022 - at -4.9% - on a seasonally-adjusted annualised basis. A more forward-looking indicator of possible economic performance is the South African Reserve Bank’s (SARB) composite leading business cycle indicator. The most recent data point - for February 2023 - still showed a month-on-month and year-on-year decline.
Of the two more recent leading indicators that are incorporated in the leading business cycle indicator, the Manufacturing PMI New Sales Index - 44.3 on a scale of 0 to 100 - and NAAMSA new passenger vehicle sales - -5.8% year on year decline - provide a more recent update of likely economic weakness.
Challenges
Although it is not the only challenge, interest rate hiking to date is expected to play a key role in the commercial property market weakening in 2023.
This latest interest rate hike comes at a particularly inconvenient time, with a slowing world economy also taking its toll on the South African economy, along with ongoing heightened load shedding exerting pressure - on the economy as well as property owners and tenants.
In addition to the direct impact of rate hiking on slowing commercial mortgage borrowing growth, it also takes its toll on the financial strength of commercial tenants. Businesses also have other forms of debt, and their customers are negatively affected by the slower economy.
The direct impact of interest rate hikes on consumers' disposable income, along with the impact of the higher inflation that caused the rate hikes, are key negatives for consumer spending which means that retail property will also feel the effects.
Loos says the situation is likely to be similar in the hotel property market because consumers may spend more conservatively on holiday travel in these tougher financial times. Meanwhile, hotel revenues are still struggling to return to pre-Covid 19 lockdown levels.
The upshot is that cumulative interest rate hiking to date will likely result in demand for mortgage-financed commercial property to cool down further, and the commercial property market will soften. Property income growth will come under increased pressure, with vacancy rates possibly rising once more as financial pressure on tenants grows.
Writer: Sarah-Jane Meyer
