Diving into South Africa’s real estate capital markets (2024)

Brought to you byJLL Africa

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CIARAN RYAN: The health of commercial real estate is tied to overall economic activity, and 2023 was a tough year for the sector. Last year we saw total direct commercial property investment increase 3% to R17.2billion, which is below the historic five-year average of R19.1billion. That’s according to a recently released South African investment review by JLLAfrica.

The backdrop to this tough year for commercial property hardly needs repeating. There’s been low economic growth [and] relatively sticky inflation of between 6.9% and 5.8% for the last two years, and that of course eats away at purchasing power. Then there’s the high cost of capital. To discuss this report we are joined by Pepler Sandri, director of Capital Market Transactions at JLLAfrica. JLLAfrica is a property advisory company and brokerage.

Welcome, Pepler. Can you give us a brief summary of the report, and the key findings?

PEPLER SANDRI: Firstly, thank you for inviting me and giving me the opportunity to discuss our flagship research report. We’ve been conducting research for the past eight years, tracking transaction activity in South Africa. The report focuses on direct property transactions of over R20million, and in the eighth iteration of the report we’ve seen some interesting trends emerge, and I guess that’s what I’m here to discuss today.

CIARAN RYAN: Alright. I did read the report and I see that there’s no doubt that Covid – the lockdowns, and staff being allowed to work from both home and office – impacted the property market. Are we seeing a return to a more normal condition?

PEPLER SANDRI: In some of the sub-sectors, yes. I think the office sub-sector still has a way to go in terms of recovering and getting back to normal. We saw increased transaction volume over the past two years in the industrial sector, as well as the retail sector.

However, offices have seen a dramatic decrease in transaction volume across the provinces.

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And while it used to make up the largest portion of the investment market in South Africa going back to 2016/17, it now languishes in second-last place, just a little bit above alternatives, which we’ll get into as we go along.

CIARAN RYAN: Reading through the reports, I noticed the Western Cape is achieving record activity levels. How are we doing elsewhere in the country, and are we seeing the impact of semigration on the property market?

PEPLER SANDRI: Yes, we are seeing the effects of semigration. The Western Cape has increased its total market share of total investment volume. It has gone up from around 10% to roughly a quarter of the total transaction volume in South Africa. And Gauteng, whereas it used to take up roughly three-quarters of all transaction volume in South Africa, has decreased to roughly 50% of volume.

What is driving the decrease in total market share in Gauteng is mostly driven by the decline in office transactions. Office transactions have lost roughly R5billion rand year on year over the period, below the average, and that’s mostly coming out of the Gauteng portion of market share.

However, Gauteng has seen an increase in the number of shopping centres sold and transacted in the last two years. It’s an upward trend.

And also in the industrial sector Gauteng has seen an Increase in volume post-Covid.

The rest of South Africa and KZN have been relatively steady over the past two years coming out of Covid.

CIARAN RYAN: The one point that astonished me is the Western Cape – the jump in market share from – was it 10%? – to 25% of the total country’s property transaction value. Why is that?

PEPLER SANDRI: I think it’s perceived to be a relatively stable part of the economy in South Africa. The municipalities on a relative basis have [been] managed more effectively, and it’s seen as an area where capital will appreciate, or the value of property will appreciate on a capital-value-per-square-metre basis.

There’s a higher GDP growth rate in the Western Cape relative to the other provinces. So there’s growth, prospects are good – and growth is ultimately driven by demand.

Demand in turn is driven by people and semigration and the increase in the number of people moving to the Western Cape. A well-managed provincial and municipal government leads to an increase in investment in the province. Investment increases there. It has to move out from somewhere else, and it’s moving from Gauteng to the Western Cape.

CIARAN RYAN: Right. So it does seem – and you say this in the report – that the level of activity is very much governed by economic growth, And with economic growth in the Western Cape being higher, one would expect to see some uptick there.

But let’s break it down by sector, such as the demand for industrial office and retail. What trends are you seeing there?

PEPLER SANDRI: One of the key trends we’re seeing in industrial is the number of transactions in the last two years.

In 2022 and 2023 we’ve seen a doubling in the count of transactions in the industrial sector over the past two years.

And in the last year, between 2022 and 2023, the total investment volume increased by 15%. But the number of deals is much higher, which means there are [fewer] smaller transactions happening – which is a consequence of smaller funds and owner-occupiers buying properties – much more than in the past.

And it’s also symptomatic of the fact that there are fewer large investment-grade assets trading hands than in the past, which is an internal function of the Reit sector really being inactive in transacting larger assets.

CIARAN RYAN: Okay – the Reit sector being the real estate investment trust sector?

PEPLER SANDRI: Correct. So typically, if you go back to 2016, they would be net buyers. They would make up more than 50% of the market from a buyer’s perspective, whereas now they are net sellers and have been for a number of years.

More than 50% of sales are coming from the Reit sector.

And that’s a function of them disposing of non-core assets, in the majority, to alleviate pressure on their balance sheets and reduce loan-to-value ratios so that they comply with the listing regulations.

CIARAN RYAN: Gauteng seems to be doing poorly in terms of office sales. Is this to be expected? We are talking about the industrial hub of the country. Why is that happening?

PEPLER SANDRI: Well, it’s somewhat prevalent throughout developed markets.

The office sector in Europe, in Berlin, in Paris and in London has come off; and in the US for that matter it has come off dramatically. It’s the same in South Africa.

We used to average R5-7billion a year in transaction volume in the office sector; it has now dropped to just below R2billion, which is a dramatic drop-off.

And it’s been coming off year on year. It’s sort of a perfect storm in the sector, really. Large corporates, after Covid, have seen that return to work has been somewhat slow. They don’t require as much base as they used to. We’ve also seen a large amount of supply come onto the market in the South African office market, somewhat oversupplied at the time of Covid and it hasn’t really recovered since.

There’s a large move to some well-known nodes, [with] corporates downsizing and taking up less space, leaving quite a bit of vacancy in Sandton and other prominent areas. And secondary nodes have taken a lot of strain, where B-grade offices and C-grade offices aren’t being filled as corporates downsize to premium-grade office space. So transaction volume is at an all-time low.

There was one investment-grade sale with a long-term lease in place last year. Recovery in the office segment in investment sales will take some time. It’s probably reaching the bottom of the cycle from an office perspective and should pick up in the medium term

CIARAN RYAN: And yet the Western Cape office sector is doing much better.

PEPLER SANDRI: Yes, there’s very little vacancy in the premium portion of the market. A large investment sale was announced mid-year last year and will come through in the investment sales data in 2024. And even B- and C-grade space is taken up largely by BPOs – business process outsourcing companies; call centres. They’ve relocated a large portion of their workforce to the Western Cape from other countries.

And there’s a strategic drive from a lot of large multinational BPOs to place a call centre in Cape Town. It’s moving north. There is obviously Umhlanga; there’s a large call-centre occupier market.

And then in the medium term they should start to relocate to certain areas within Gauteng as well.

Another interesting trend out of Cape Town is that heritage buildings are being bought up in Adderley Street, Briar Road and Long Street, with a view to urban renewal and high capital values per square metre. So across the board in the Western Cape the office sector is doing relatively well in terms of smaller deals.

CIARAN RYAN: Going back to Covid again, one of the findings in the report is that alternative property investments are doing quite well. When we talk ‘alternatives’ I’m talking here about student accommodation, the filling stations, and the data centres which you’ve just been talking about. Why is that? Why is ‘alternative’ picking up so much of the slack?

PEPLER SANDRI: In the alternative sub-category of investments we’ve seen a steady growth over the past four or five years.

In 2021 there were major student accommodation deals that happened, driving up volume. Since then there’s been a bit of a drop-off because those deals were substantial – over R4billion worth in two platform sales.

We’ve seen a mixed bag, really, in terms of the majority stake in the alternative space.

In 2022, we saw a number of filling stations trade hands – over a dozen. This year we’ve seen over half a dozen hotels trade hands.

CIARAN RYAN: Is that across the country?

PEPLER SANDRI: Across the country in the alternative space – because these are nascent new sectors really, developing sectors; data centres, for instance – the secondary market for data centres isn’t there yet.

Most of these data centres that are being developed are tightly held by the occupier, and the land is bought by the occupier. And then the development is done by the ultimate occupy of the data centre.

Will a secondary market emerge whereby data centres are disposed of with leases in place, and traded? If the developed markets are anything to go by, yes, but that’s some way off.

We are seeing this in operation-intensive asset classes like student accommodation with a high element of operational expertise, etc.

The hospitality sector also has a high degree of management intensity behind the income streams. We are seeing slow and steady progress as those benchmarks around operating costs, etc, emerge and are established.

We’ll see those asset classes take up more and more market share, there’s no doubt. We’ve seen it in the developed markets in the US, in the UK, etc.

These alternative asset classes are taking up more and more market share. It should happen in South Africa.

Last year, I would say, would be the return of the hospitality sector, where there were no major transactions in 2021/22 as the aftermath of Covid as the income streams in those hotels were uncertain at that point. They’ve come out and we’ve seen a number of hospitality deals concluding last year and a number to conclude this year – which is encouraging for the sector. This shows that the hospitality sector or hotels have emerged out of Covid and are recovering.

CIARAN RYAN: We are going to leave it there. Some fascinating, encouraging and also some rather alarming trends coming from this report. That was Pepler Sandri, director of Capital Market Transactions at JLL Africa.

Brought to you byJLL Africa.

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