SA commercial property sector still under pressure in 2024, CEOs say

Earnings growth in South Africa’s commercial real estate industry will still be under pressure in 2024 due to high finance costs unless the central bank starts to aggressively cut interest rates, executives of the country’s top two property groups said on Thursday.

Commercial real estate was one of the hardest hit by the pandemic, when government-imposed lockdowns shut offices and limited shopping trips, resulting in some tenants deferring rent, hitting income and profits for the industry.

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While share prices have recovered, property companies are facing a double whammy of office oversupply and sharply higher funding costs driven by higher interest rates.

Estienne de Klerk, CEO of Growthpoint Properties South Africa business told Reuters on the sidelines of a property conference that property fundamentals certainly have stabilised and seem to be improving, however “it doesn’t mean that it isn’t tough out there.”

Growthpoint

“In terms of distributions, I do think that this year and potentially still next year the industry will still be hampered by interest rates coming through the debt book as we roll out of interest rate hedges into more expensive interest rate hedges,” he said.

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Distributable income per share (DIPS)- one of the primary measures of underlying financial performance in the listed property sector – of some property companies like the country’s biggest real estate group Growthpoint and no.2 Redefine Properties have either marginally risen or decreased, mainly hit by high rates.

Redefine

South Africa’s Reserve Bank paused its interest rate hiking cycle in July for the first time since November 2021. Economists expect rate cuts to restart as early as May this year.

A high interest rate environment also lowers the asset value of properties.

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In a rising interest rate environment, 77.7% of Growthpoint’s debt book is hedged, while domestic finance costs, including finance costs and income received on interest rate swaps, increased by R215 million ($11.34 million) during its financial year ended June 30.

Redefine is also hedged at 77.1% of total group debt. Its cost of debt ticked up by 110 basis points to 7.1% in the year ended August 31 from 6% in 2022 due to higher rates.

Leon Kok, the Chief Operating Officer at Redefine also told Reuters at the sideline of the conference that “from a property performance point of view there is definitely signs that it has bottomed out,” although power cuts, municipal costs, water scarcity and security remain a key risk.