For retail property, repo rate cuts will directly boost disposable income and have an indirect effect through the broader economy.
The 25-basis point repo rate cut by the South African Reserve Bank is likely to have a limited impact on demand in the commercial property market.
It is expected that the Monetary Policy Committee will make more cuts as we move into 2025, which will offer South Africans some breathing space.
“Commercial property buyer and investor demand will likely strengthen slowly throughout 2025, as this market is typically more correlated with economic growth than interest rate movements, compared to the more interest rate-sensitive residential market,” says John Loos, Senior Economist at FNB Commercial Property Finance.
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Impact of repo rate cuts
Loos says the impact of interest rate cuts on commercial property buyer and investor demand is expected to be indirect via the influence that lower interest rates have in boosting real economic growth, which, in turn, drives demand for commercial space and improves property income.
“For the office property market, declining interest rates can have a positive impact in two ways.”
The first one is driving economic recovery which could lead to employment growth in the Finance, Real Estate, and Business Services (FIRE) sector, a major driver of office space demand—potentially reversing recent declines.
Limited impact of repo rate cuts
He, however, notes that the impact may be limited given the widespread adoption of hybrid work models, which leave significant unused space in many office buildings even during peak attendance times.
“The second positive impact on the office market could come from a faster reduction in the oversupply of space if high-density residential demand picks up, leading to an increased pace of office-to-residential conversions.”
For retail property, repo rate cuts will directly boost disposable income and have an indirect effect through the broader economy.
“Combined with lower consumer inflation, this could result in faster real disposable income growth in 2025, driving increased retail spending and improved financial performance for retail centres.”
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Expectations
He expects that there will be strengthening in the performance of retail properties in the near term.
“The outperforming industrial property market, particularly the warehousing and logistics segment, is also likely to experience stronger demand for space due to interest rate cuts, particularly if retail activity picks up. Which could also lead to increased buyer and investor interest.”
Major property sectors
Loos believes that repo rate cuts are likely to result in further declines in vacancy rates next year. But when it comes to the industrial property sector’s vacancy rate, he believes it is already very low, and building activity is at higher levels than the other sectors, which poses a risk to this prediction.
“Lower vacancy rates are likely to translate into higher rental and operating income growth, stronger total returns, and improved investor and buyer demand.”
When it comes to the residential development side, he is of the view that recovery can take a little longer. This is as new building activity has declined significantly due to repo rate hikes.
“This market only recovers after a lag, following a positive response in the existing home market to interest rate cuts.”
They anticipate mortgage advances growth to accelerate into higher single digits from the low single digits seen recently, driven by the positive impact of interest rate cuts on demand for this type of credit.
“As of September 2024, year-on-year growth in commercial mortgage advances was a modest 3.6%.”
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