Central banks around the world have slashed interest rates and provided emergency loans in the wake of Covid-19. The South African Reserve Bank is no exception.
With interest rates slashed by 200 basis points (2%) since the pandemic began, the repo rate is currently 4.25%* with the prime lending rate at 7.75%*. The question on everyone’s mind – experts included – is whether these record low-interest rates will be enough to deliver a recovery in the economy and the commercial property sector.
Let’s take a look at the possible scenarios that may play out over the next few months and beyond.
Rates are low – but will lenders be keen to lend?
Under normal circumstances, a 2% rate cut in a single month would be expected to kick the economy into gear – but these are not normal times.
- If the easing of SA’s lockdown proceeds smoothly and relatively quickly and economic activity picks up, lenders may feel confident enough to extend credit and finance new construction projects or approve commercial property bonds.
- On the other hand, if the lockdown goes back to level 5 or a new wave of infections threatens to overwhelm the medical system there could be further economic interruptions. Banks and other financiers may be reluctant to lend – and if so, the benefits of lower interest rates won’t be extended to prospective owners.
While the rate cuts will certainly help existing commercial property Cape Town owners to service their bonds, it remains to be seen whether it will translate into an uptick in new projects.
Hope for Cape Town: plenty of construction is already in the pipeline
While new projects may see their commencement dates pushed back by the economic fallout of Covid-19, there are many existing developments under construction in Cape Town which are ready to recommence.
- In the short term, projects that were approved and financed prior to the pandemic will be completed once the lockdown is lifted.
- While there may be a short-term dip in demand from new tenants – due to travel restrictions and remote working – once the pandemic passes there should be an uptick in rental and purchase enquiries.
- If the lower interest rates persist, this could be the perfect time to start looking for new office space and finance it with attractive borrowing costs.
Preparing for the future is key
Only time will tell what the effect of the interest rate cuts will be on the property sector – and the best thing tenants and owners can do is to prepare for the day when business returns to normal.
If you have any queries about commercial property in the greater Cape Town area, contact our team today.
* As at the date of publication May 2020