SA direct property investment returns beat inflation
For the year to end-December 2022, SA’s direct real estate recorded 9.1% in total investment returns, with the industrial property sector the best performing segment for the fourth year running, recording doubledigit total returns.
Since recording negative returns in 2020 at the height of the pandemic, investment returns have made a full recovery.
“The improvement in total return was due to positive capital growth recorded for the first time since 2018, but income return slipped to 8% in 2022 from 8.1% in 2021,” said Eileen Andrew, vice-president for client coverage at MSCI.
MSCI is a global provider of analytics research and indices. Its SA Annual Property index released on April 6 shows that total return recorded for 2022 was 9.1%. This is a large improvement on 5.3% in 2021 and -3% in 2020.
Sponsored by Absa Commercial Property Finance, the index is based on asset data collected from a sample of 1,971 properties across 26 portfolios valued at R370bn at the end of December 2022. This represents about 56% of professionally managed investment property in the country.
During the reporting period, the overall property vacancy rate remained at 8.4% and topline rental growth turned from a -2.2% in 2021 to 4.3% in 2022. Net operating income — the rental income a portfolio generates minus operating expenses — decreased 0.9% as property owners struggled with rising operating costs.
HEADWINDS
Andrew said a return on direct property investment that beats inflation in a market that has faced headwinds in the past three years is good news. However, increasing operating costs are eating into income faster than ever before.
“We see this in the costs-toincome ratio that has jumped to 43% from 35% five years ago,” Andrew said.
For example, for every R100, R35.90 went towards operating costs, and this has since increased to R43.
High inflation and rising interest rates have added pressure to operating costs, which have increased significantly in the past five years.
During the five-year period, total operating costs as a percentage of gross income rose from 37% to 45% for retail, and 32% to 43% for offices, with the industrial property sector increasing from 32% to 36%.
In December 2017, average monthly total gross operating costs per square metre across all three sectors was just more than R50/m², and this has increased significantly to reach R79/m² in December 2022.
Of the three sectors, retail has seen a significant increase from R82.70/m² in 2017 to R120.50/m², followed by the office sector, up from R53.80/m² to R78.40/m² and that for industrial, up from R19.50/m² to R27.50/m² in December.
Data from the index show that electricity, property taxes and municipal charges were the three biggest operating costs for all property sectors.
Electricity costs amounted to nearly R23/m², property taxes came in second at R19.96/m², municipal and utility costs recorded just more than R5/m² with security expenses and building maintenance costs just below R5/m² in 2022.
Tenants are feeling the pinch from increased occupational costs. For example, for every R100, about 67% goes to the landlord in rental and 18% in recoveries such as water, with about 14.2% for rates and taxes.
In 2018, landlords were getting about 71% in recoveries, but this has declined to 58%, said Andrew.
TOP PERFORMER
The industrial property sector was the top performer for the fourth year running, recording a total return of 13.5%. Vacancies continued to decrease, reaching 4.4% with rental growth of 5.1%.
Andrew said most of this rental growth is seen in big box, modern and built-for-purpose logistics with increased efficiencies which reduce operating costs to an extent.
She said demand for logistics and warehousing facilities will continue to increase, driven by growth in e-commerce and supply chain optimisation.
Vacancies in warehousing and distribution centres fell to 2.9% in 2022, the lowest in the past five years.
Retail property, also the index’s largest sector by value (58% of capital value), bounced back and posted a total return of 9.4% — a combination of 1.7% capital growth and 7.6% income return.
In 2021, the retail property sector recorded a 6.5% total return from -4.4% in 2020, down from 7.6% in 2019.
Community and neighbourhood shopping centres delivered the best returns while other retail formats posted positive rental and net income growth.
The office sector, which remains under pressure, saw total return improve from 0.7% in 2021 to 6.6%. However, capital growth recorded -1.5% with 8.2% in income return and rental growth up 0.7%.
Vacancies remain in double digits at 18.4%. This comes as occupiers continue to assess their space requirements, with many reducing the space they occupy.
Economic growth will lead to meaningful improvement in the sector’s fundamentals and also drive demand for office space.
“Given increased operating costs and market uncertainty, the next three to four years are likely to remain challenging for the property sector,” said Andrew.