South Africa Commercial Real Estate Market - Growth, Trends, COVID-19 Impact, and Forecast (2023-2028)

The South Africa Commercial Real Estate Market is anticipated to register a CAGR of over 5% during the forecast period

Key Highlights

• Before the COVID-19 pandemic, the commercial real estate sector was facing difficulties. These will probably last for a while due to changes in work practices brought on by the pandemic. These will probably worsen as the impact of "shadow vacancies" becomes more evident, leading to an increase in the number of vacant properties. Many businesses want to downscale their physical workplaces in favor of the smaller office spaces required for hybrid workforces.
• On the plus side, most urban centers are demanding affordable residential housing. Since many of these pre-existing commercial buildings have services, repurposing them is generally simple and affordable. This tendency is already well established in many cities, and as more offices fall empty in the upcoming months and years, it will pick up speed. Aside from saving money, repurposing a building also eases the burden on governments which are already under strain to provide services and utilities. The fact that these converted buildings are already situated within cities further reduces the need for inhabitants to commute, decreasing traffic and the strain on public transportation infrastructure.
• While the current state of the global economy is putting pressure on investors in most segments of the domestic real estate market, Makhosini Ndlovu, product head at FNB Commercial Property Finance, claims that those who have invested in student housing continue to see strong returns. Yields remain very good for some universities, such as the University of Cape Town (UCT), and regardless of how many approvals are given for the construction of student housing near UCT, domestic and international demand for study opportunities there will probably maintain demand for housing in the upcoming years.

South Africa Commercial Real Estate Market Trends

Increasing office space demand in South Africa

South Africa has seen its historically robust office fundamentals erode significantly over the last year. Vacancy rates have steadily risen as corporate consolidations and the rise in work-from-home result in more space being given up in the market. At the end of the second quarter of 2022, Johannesburg had the highest office vacancy rate across all major metropolitans.

The vacancy rate of office real estate increased across all major markets in South Africa between the first quarter of 2021 and the first quarter of 2022. Pretoria and the Surrounds had the lowest vacancy rate of 12.1 percent in 2022. Johannesburg, on the other hand, had the highest share of vacant office space at over 19 percent. Office demand dynamics have shifted considerably as many corporates continue to scale down on space requirements in line with the new work-from-home and the office rotational hybrid model.

Office demand dynamics have continued to soften as corporates look to scale down on space requirements in line with new work-from-home and office rotational hybrid models. The net effect is that office foot count has declined significantly from pre-pandemic levels. While office fundamentals are expected to continue softening over the foreseeable future, qualifying tenants may find great opportunities to secure favorable long-term lease arrangements.

Increased Industrial Segment Growth Creating Opportunities for the Market

Prime industrial property had the lowest investment yield among different commercial real estate types in Cape Town, South Africa in the first quarter of 2022. Yield measures the expected return of an investment property and is calculated as the annual rental income divided by the property value. Investors expected a return on investment of 8.25 percent for prime industrial properties, while for rental housing this figure was 9.5 percent.

According to JLL data, Pretoria and the Surrounds and Cape Town were the South African markets with the lowest average vacancy rate for industrial real estate in the first quarter of 2022. During that quarter, approximately 4.9 percent of industrial real estate was vacant. In Johannesburg, this share was slightly higher at 4.95 percent.

Prime industrial property had the lowest investment yield among different commercial real estate types in Cape Town, South Africa in the first quarter of 2022, according to Knight Frank data. Yield measures the expected return of an investment property and is calculated as the annual rental income divided by the property value. Investors expected a return on investment of eight percent for prime industrial properties, while for rental housing this figure was 9.5 percent.

According to Knight Frank, the industrial property sector was the only one which experienced an increase in prime rents in Cape Town, South Africa between 2020 and 2022. From 5.5 USD in the first quarter of 2020, the monthly square meter rent of industrial space grew to 6.9 USD in the first quarter of 2022. Rental rates for retail space, on the other hand, halved during the period.

South Africa Commercial Real Estate Market Competitor Analysis

The South African commercial real estate market is fragmented with the presence of local and global players. Developers are more inclined to spend money on reinventing property rather than building on new land. Some of the country's major commercial real estate players include Growthpoint Properties, Amdec Group, Pam Golding Properties, Excellerate JHI, and Chas Everitt Property Group.

It is also noted that South Africans are migrating to invest in properties outside Africa, mostly in Europe, due to its robust economy and growth. South Africa's REIT sector is outperforming in terms of returns to investors. There is a need for investment in all sectors to foster further development in commercial real estate in South Africa.

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