Political instability and corruption in 2016 coupled with low economic growth has shaken investor confidence in the South African economy. These issues along with the Reserve Bank’s decision to increase the repo rate do affect the property market, but what effect is turbulent SA politics having on the commercial property sector?
Sought after locations and more valuable buildings affected less
According to Kerry Haggard’s special report for the Mail & Guardian, ‘Boom or bust for property?’ commercial property in sought after locations in the first half of 2016 continued to see high rental demand. Even though political turbulence and a weaker rand have narrowed affordability for many tenants, investing in commercial property in central areas (such as Cape Town’s CBD) provides some protection against the shocks of political tumult.
New commercial property developments hit hardest
Due to the hike in interest rates, the cost of borrowing money is higher and new commercial property developments requiring extensive financing have thus been hit hardest. Existing commercial properties that do not require further development also do not have to contend with rising import prices.
Primary issue will be increased cost of borrowing
As the cost of borrowing money increases, it will be harder for tenants with smaller revenue streams to purchase commercial property. In Haggard’s report, Tony Galletti, CEO of Galetti Knight Frank is quoted saying; ‘As the cost of borrowing goes up, the value of property goes down.’ Yet there is hope for commercial property owners since the market tends to respond more to long-term changes and has shown resilience, weathering short-term upsets well.
Smart investors can benefit from the volatile market
A key takeaway is that even though South African politics are directly contributing to economic instability, savvy investors can benefit from market volatility. Investors who purchase commercial properties that are both sought-after and well-priced will have valuable assets still when the storm clears. Even though many investors are moving their assets off-shore and purchasing commercial property overseas, doing this can mean missing valuable opportunities on South Africa’s shores.
The industrial sector has remained resilient
According to reports, even though office rentals have suffered a knock during the tumult of 2016, the industrial commercial property sector has remained strong. New shopping malls have also performed well in the country; consequently, it is hard to say conclusively that the political situation in South Africa has had solely negative outcomes for the commercial property market.
Looking forward to 2017
Factions within the ruling party and South Africa being on investment rating agencies watch lists, along with slow growth all portend considerable instability for 2017. Yet if you invest in the right commercial property and don’t give in to prevailing negativity or get sucked into unsustainable borrowing patterns, it’s possible to avoid the turbulence predicted for the coming year.