The Reserve Bank in May announced its decision to maintain the repo rate at 5.75%, with the commercial lending rate steady at 9.25%. Property specialists and commercial banks view short-term, small rate movements as having little discernible impact on the value of property investments – the effect of such fluctuations is mostly reflected in credit-based consumer spending. If rate hikes continue into the long term, commercial real estate could start experiencing knock-on effects, starting with retail. As consumer spending in terms of disposable income goes down amidst a heightened cost of credit, liquidity issues may arise for retail tenants and owners. This would eventually translate into increased vacancy rates for the property sector and downward pressure on rental returns.
The Bank’s decision to maintain a steady interest rate is thus good news for those vested in commercial real estate. Developmental loans for property projects will be more affordable, while business confidence in the sector should remain level.
Indications of a Renewed Confidence in Commercial Real Estate
The interest rate forms a consideration in capitalisation rates, used to convert a property’s estimated annual income to its market value. Far more important when assessing yield and valuation, however, are location and property suitability for potential tenants. Commercial transactions and consumer spending do not always involve interest. What is happening in the Cape Town market at present is a surge in retail sector performance, led by the world-class V&A Waterfront and a full pipeline of mixed-use developments at Century City.
Further underlining the business confidence in Cape commercial real estate are the construction of a new, R225m office building in the heart of Claremont, to be completed in June 2016 and owned by firms Atterbury, Citadel, and Catalyst; the recent launch of the R1bn Radisson Blu Hotel in the CBD to accommodate business and leisure; and development of the 5600m2 Phase Two of Greenford Office Park in Kenilworth, in which six of the seven office buildings have already been sold or let as of mid-June.
This momentum can be expected to last for the next few years as Cape Town continues its rise as a prominent business and lifestyle destination.