Understanding the property industry’s predictions and trends for the coming year can be as vital as finalising a lease with a tenant or securing your next investment.
In either case, if the former is not clear, it will be detrimental to the salient terms of the latter.
Prior to delving into 2023, it is necessary to examine market attitudes from the fourth quarter of 2022.
“The global economy has been characterised by rising interest rates, energy supply limits, climate change, and volatile geopolitics,” says Andrew Dewey, MD of Swindon Property.
A reflection on the industrial market
The industrial real estate market had a prosperous 2022, with national nominal rents per 500m2 increasing by 5.3%, a significant increase from 2021’s 2.2%.
Building cost inflation of 11% will however put pressure on re-developments and new build costs which in turn will see industrial rentals continue to rise.
Comparing the survey results of Q4 2021 to Q4 2018, shows that rental growth stayed constant at approximately 5.7%.
This indicates that the industrial sector continues to enjoy a commanding advantage over the other three economic sectors.
Dewey says the market has been bolstered by sustained low vacancies, particularly in logistics-related warehouses.
“This has been as a result of the robust online retail sales sector and consolidation measures taken by large national companies.”
A rejuvenated market
In 2023, Dewey anticipates a surge in demand for commercial rental properties, which would stimulate the market.
“Although loan rates that plummeted dramatically during lockdown have steadily risen over the past 18 months, the market remains mainly robust,” he says.
Therefore, the outlook for the South African real estate market in 2023 is fairly positive.
Important market trends for 2023
Dewey forecasts that the majority of trends that will emerge in 2023 will be a continuation of market adjustments that began in the post-pandemic climate of 2022.
South Africa’s commercial real estate market, which is on a gradual but steady path to recovery, reached a turning point in 2022.
In comparison to office and retail, the industrial sector had the highest rental growth rate and lowest vacancy rates in 2021 and 2022.
“We anticipate this trend to continue in 2023 due to the sustained strong demand and low supply for properties of this type, especially in desirable locations that offer ease of access, close proximity to the main arterials, ports and airport and sound infrastructure,” says Dewey.
In 2023, the retail property sector is anticipated to continue its recovery, with a retail vacancy rate of 5.8% and a reported success rate for renewals of 82.7%.
The Covid-19 outbreak temporarily halted in-person property auctions, causing the industry to transition to online auctions. Now that the health concern has passed, it’s anticipated that in person auctions will once again predominate and there is likely to be a hybrid model.
The persistently high office vacancy rates in South Africa have compelled landlords to become more inventive, culminating in the transformation of typical office space. Today, “space as a service” is a popular topic of conversation, and by 2023, this trend is expected to gain greater speed.
B-grade office space is the focus of a second trend that has evolved. This category describes buildings that are typically smaller, older, and equipped with less facilities. There is a big opportunity for investors to renovate these buildings and bring them to market.
Tenants are increasingly choosing buildings that meet their ESG (Environmental, Social, and Governance) requirements, and this trend is projected to continue into 2023.
“They’re interested in structures that have been constructed to have a beneficial effect on the environment and the communities in which they are situated,” says Dewey.
Summing things up
Overall, a rush of distressed property returning to the market is unlikely, and prices should continue to rise, albeit slowly.
Simultaneously, reduced affordability levels resulting from higher interest rates and weak wage growth will continue to boost the market and increase returns for individuals who already own property portfolio.
”Broadly speaking, I believe we will see double-digit returns on selling yields, a slowdown in off-plan residential sales in central nodes, a reduction of office & retail vacancies, and a significant upward shift in rental escalations,” says Dewey.