Index shows resilience
PROPERTY: VACANCIES, REVERSIONS IMPROVE
Data shows the industry achieved total return of 8.7% last year, despite tough economic backdrop.
Despite the challenging economic backdrop, high interest rate environments and elevated cost pressures associated with load shedding, the domestic property sector delivered a resilient performance last year, according to data from the annual MSCI South Africa Property Index.
The SA Property Index achieved a return of 8.7% last year (vs 9.3% in 2022), with the income return improving to 8.3% and capital return slowing to 0.4%. The net operating income (NOI) growth of 4.5% achieved last year lagged inflation, which is not surprising given the elevated cost pressures associated with load shedding and above-inflationary increases in property taxes.
Key operating metrics – specifically vacancies and reversions – continue to show sustained improvement, which is encouraging in a tough operating environment.
Across the globe, 2023 was characterised by swings in market sentiment due to the fluctuating views on inflation, interest rate expectations and concerns that major economies could fall into a recession.
Ongoing geopolitical tensions have disrupted supply chains, adding additional upside risk to inflation which further dampened consumer and business confidence.
During the last quarter of 2023, inflation started to ease and widespread expectations of global interest rate cuts supported a welcome change in sentiment.
Given its interest rate sensitive nature, the SA listed property sector was a laggard for much of the calendar year 2023, however the sector rallied in the last quarter of 2023 largely driven by the pivot in expectations towards likely interest rate cuts.
This resulted in the FTSE/JSE All Property Index and the FTSE/JSE SA Listed Property Index achieving a total return of 10.7% and 10.1% respectively for CY23, ahead of SA Equities (9.3%), SA Bonds (9.7%), and SA cash (7.8%).
The retail sector (comprising 59% of the MSCI index by value) delivered a strong performance off a high base, achieving a total return of 9.7% (vs 9.4% in 2022). According to the South African Property Owners Association (Sapoa), the fourth quarter 2023 Retail Trends Report, yearon-year annualised trading density growth (ATD) continued to moderate, slowing to 5.7% for the fourth quarter from 7.6% in the previous quarter.
This deceleration comes as little surprise given the subdued consumer environment with higher debt service costs and muted wage growth weighing on disposable incomes. ATD growth continues to be driven primarily by growth in foot count as opposed to increasing spend per head. Foot count, however, remains approximately 10% below its pre-pandemic base, according to Sapoa.
Retailers’ cost of occupancy further improved in Q4 2023 to 6.8% according to Sapoa, reaching its healthiest level in almost 10 years. The sustained improvement in recent periods has been driven by tenant sales growth running ahead of rental growth. Healthier occupancy cost ratios and low average vacancies have increased the bargaining power of landlords in leasing negotiations.
As a result, there has been a sustained improvement in rental reversions on average with an increasing number of landlords reporting positive reversions within their retail portfolios in recent updates.
The office sector (20% of the MSCI index) continued to be slow relative to other property sub-sectors, achieving a total return of 4.8%.
Constrained office development activity and increased demand for space, in part due to load shedding and a push for “return-to-office” from some employers has led to an improvement in office occupancies, with Sapoa reporting a vacancy rate of 15.2% in Q4 2023, down 30bps from the previous quarter and the sixth consecutive quarter of improvement.