1st Quarter economic growth disappoints
Earlier this week saw the release of first quarter GDP figures. The growth rate disappointed, coming out at 0.1% quarter on quarter seasonally adjusted, which was down from 0.4% for the fourth quarter. On a year-on-year basis, the growth rate remained virtually unchanged at a weak 0.8% in the first quarter.
This begs the question as to whether investment in the property market in South Africa can maintain its strengthening momentum in 2025?
Unlike the economy, property market performance has shown some signs of improvement early in 2025
Despite a poor start to 2025 for the economy, we do believe that investor demand for commercial property can continue to strengthen moderately in 2025. The FNB Property Broker Survey for the first quarter of 2025 did show a perceived quarterly strengthening in commercial property sales activity in all three major commercial classes, i.e., office, industrial and retail property. This investor demand strengthening early in the year was likely supported by three 25 basis point interest rate cuts by the SARB, commencing in September 2024.
We believe that the moderate increase in commercial property demand early in 2024 has benefited the commercial mortgage lending sector mildly, translating into a gradual further acceleration in year-on-year growth in the value of commercial mortgage advances, from 5.26% at the end of 2024 to 6.25% at the end of April 2025. This growth acceleration commenced towards mid-2024, after reaching a low of 3.16% in May last year.
Our one concern relating to commercial property demand had been a pause in interest rate cutting by the SARB at its March 2025 meeting, but it resumed cutting with a 25-basis point cut at its May meeting. FNB expects a further 25 basis point rate cut in the second-half of the year.
A further concern for the property market in recent months has been the great uncertainty created by US-instigated trade tariff wars, which have risked weakening the global economy significantly, should high US import tariffs be implemented. Whilst we are not out of the woods yet, with President Trump still attempting to cut tariff deals with major trading partners, he has backed off from a number of his trade tariff threats, and it increasingly appears as if global import tariffs could settle at significantly lower levels than what was threatened. Therefore, a sharp global economic slowdown could be averted, which in turn would limit the pressure on South Africa’s export growth.
The biggest direct risk of a global trade war would be on South Africa’s industrial property class, especially the manufacturing component thereof, but insofar as it may ultimately slow South Africa’s entire economic growth rate, it would pose risks to the country’s broader property sector too.
The global trade tariff war has contributed to FNB lowering its GDP growth forecast to 1.3% for 2025, from nearer to 2% initially, but this would still represent a moderately improved growth rate on the 0.6% of 2024.
Lower interest rates and stronger property income growth is expected to mildly stronger property investment in 2025.
What would continue to make property investment more attractive for investors in 2025, after a dismal 2024 that saw a -0.8% base rental decline on all commercial property according to MSCI data, and net operating income growth only slightly positive at 0.5% with the help of impressive containment of operating cost growth?
Interest rate cutting aside, we expect commercial property rental growth to accelerate in 2025 on the back of further decline in vacancy rates. In the 1st quarter 2024 FNB Property Broker Survey, brokers as a group perceived further decline in vacancy rates in all 3 major commercial property classes compared with 6 months prior to the survey.
The 1st Quarter Rode Report, reports accelerated year-on-year national rental growth in the area of office space (A+, A and B-Grade), from 4.2% in the prior quarter to 4.8% in the 1st quarter, while prime industrial rental growth, too, showed acceleration from 6.7% year-on-year in the final quarter of 2024 to 7.3% in the 1st quarter of 2024.
Improved rental growth is expected to contribute to stronger net operating income growth in 2025, although the sector will have its work cut out again in terms of containing operating cost growth, as sharp electricity tariff increases take effect, along with some big, planned water tariff increases in key metros.
The combination of lower interest rates in 2025, and projected stronger property income growth, is expected to drive further strengthening in property investment going into the 2nd half of 2025, although any such prediction must be accompanied by the word “moderate”.
Residential building activity expected to turn positive in the latter half of 2025
On the residential development side of property, we expect to see new building activity turn positive in the latter half of 2025 after severe weakness in recent years. Residential demand relative to supply in the existing home market has strengthened and is reflected in house price growth accelerating from multi-year lows around 1.5% late in 2023 to 5% year-on-year by the end of 2024, according to StatsSA data.
1st quarter residential building plans passed were still in year-on-year decline to the tune of -14%, but a stronger secondary housing market is expected to drive some growth in demand for new homes, and with it a return to positive growth in plans passed in the 2nd half of 2025, and ultimately in building completions too.
In conclusion, a moderately stronger property market is still expected in 2025
Despite many headwinds economically, we believe that South Africa’s property market can continue to strengthen on the back of stronger investment demand, driven by lower vacancy rates translating into mildly stronger rental growth, and lower interest rates. This, in turn, is still expected to lead to a stronger commercial property mortgage lending growth year in 2025.
INFO SUPPLIED.