South Africa is Africa’s second-biggest economy, with an estimated population of 57.7 million and an estimated GDP per capita of USD 6,377 in 2018. As South Africa’s economy has exited recession, there is optimistic sentiment in the real estate market. South Africa still offers a sustainable commercial property sector regardless of the country’s current economic malaise. There is currently a high level of political and economic uncertainty while investors and business leaders preferring to hold back long-term investments and commitments.

The economy may be weak currently, but the long-term outlook remains positive and growing. The commercial real estate finance sector continues to show steady improvement driven by retail, industrial and office developments. However, South Africa’s commercial real estate distribution growth expectations have been scaled back due to restrained domestic conditions, rising vacancies and an oversupply of space, especially in specific connections in the office and retail sector. While Cape Town has enjoyed a degree of buoyancy areas, Johannesburg, Durban, and Pretoria are in dire need of renewed investment activity as they encounter high vacancies and protracted rental pressure.

In Johannesburg, the office space vacancy rate in 2019 stands at 12.2%. Sandton is experiencing its highest-ever vacancy rate at 17.6% in 2019. The commercial property market in Cape Town has been in a recovery phase for time being, and demand for office space is expected to be stable with no major setbacks. There is a need for investment activity in the office and another commercial related sector which would ultimately drive the demand.

It is expected that listed property REITs to produce double-digit returns to an investor in 2019 due to its offshore exposure. Gauteng dominated investment activity in 2018, while investment growth is dominated by the office sector. Overall retail leads the way with followed by industrial and office sectors.

Key Market Trends

Office Vacancy Rates are Getting Absorbed Quickly

The City of Cape Town among the major metropolitan municipalities has the lowest vacancy rate at 7.7% in Q! 2019. The highest vacancy rate was recorded at 13.5 % for the eThekwini municipality among the larger metros. The vacancy rate of Durban CBD with 19.7% is highest in the region. Hillcrest/Gillits saw the most improvement in the vacancy rate.

The city of Johannesburg has a vacancy rate of 12.2% in the first quarter of 2019. The vacancy rates in Sandton, Sunninghill, Midrand, and Parktown were all at a multi-year high.

The city of Tshwane recorded an aggregate office rate of 9.0% down by 1.2% from a year ago. The vacancy rate of developing Highveld Technopark increased to 13%, however, speculative activity has improvement reduced which could stabilize occupancy levels in the coming time. As spaces get smaller and retrenchments increase, office vacancies will be on the rise. But the positive aspect is that these vacancies can be absorbed by converting them into serviced offices or co-working spaces.

Occupancy Rates of Hotels in South Africa Shows Marginal Growth

There is a 5.6 % compound annual increase in room revenue in South Africa’s slow-growing market. Due to water shortages in Cape town, offset by an increase in tourism led to a drop in the guest night in 2018.

The number of available rooms rose by 1.3% in 2017, the largest increase since 2011. Openings in 2017 included the Radisson Blu Hotel & Residences and Radisson Red V&A Waterfront in Cape Town and the Sun International Meropa in Polokwane, which are four-star hotels; and the Stayeasy Cape Town City Bowl, a three-star hotel.

Guest nights to grow a bit faster than room supply due to faster growth in foreign and domestic tourism, the occupancy rate for hotels is expected to edge up in 2019 through 2022.

Competitive Landscape

South Africa’s commercial real estate market is fragmented as there are many local players who compete in the market along with global players. Developers are more inclined to spend money on reinventing property, rather than building on new land. It is also noted that South African’s are migrating to invest in properties outside Africa mostly in Europe due to its robust economy and growth. Investment activity in the industrial sector was led by Gauteng in 2018. Johannesburg and Cape Town are experiencing a notable rise in demand for mixed-use buildings comprising office, health and lifestyle facilities. South Africa’s REIT sector is outperforming in terms of returns to the investor. There is a need for investment in all the sectors to foster further development in commercial real estate in South Africa.

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