Commercial property sector under pressure

Earnings growth in South Africa’s commercial real estate industry will still be under pressure this year due to high finance costs unless the SA Reserve Bank (SARB) starts to aggressively cut interest rates, say executives of the country’s top two property groups.

Commercial real estate was one of the hardest hit by Covid when government-imposed lockdowns shut offices and limited shopping trips, resulting in some tenants deferring rent, hitting income and profits for the industry.

While share prices have recovered, property companies are facing a double whammy of office oversupply and sharply higher funding costs driven by higher interest rates.

Estienne de Klerk, CEO of Growthpoint Properties, said property fundamentals had stabilised and seemed to be improving. But “it doesn’t mean that it isn’t tough out there”.

“In terms of distributions, I think that this year and potentially still next year, the industry will still be hampered by interest rates coming through the debt book as we roll out of interest rate hedges into more expensive interest rate hedges,” he said.

Distributable income per share –a primary measure of underlying financial performance in the listed property sector – of some firms like SA’s biggest real estate group, Growthpoint, and second-biggest Redefine Properties, have marginally risen or dropped, mainly hit by high rates.

The SARB paused its interest rate hiking cycle in July for the first time since November 2021.

Economists expect rate cuts to restart as early as May this year.

A high interest-rate environment also lowers the asset value of properties.

In a rising interest rate environment, 77.7% of Growthpoint’s debt book is hedged while domestic finance costs increased by R215 million in its financial year ended 30 June.

Redefine is also hedged at 77.1% of total group debt.

The company’s cost of debt increased by 110 basis points to 7.1% in the year ended 31 August from six percent in 2022 due to higher rates.