As 2023 draws to a close, we bring you our final podcast session of the year, a deep dive into the evolving property landscape. This session featured a discussion between Andrew Paterson, Head of Strategy at Rainmaker Marketing, and Keillen Ndlovu, an esteemed Independent Property Analyst with 17 years’ experience. Their conversation traversed various facets of the property market, from investment trends to the impact of global dynamics on local real estate.
The insights shared in this podcast session offer a comprehensive and nuanced understanding of the current property landscape as we transition into 2024. Both Paterson and Ndlovu provided thought-provoking perspectives, blending practical experiences with expert analysis. We take a look at some of the topics touched on.
Following his tenure at Stanlib, Ndlovu marked a period of exploration and reflection. He embarked on a journey across South Africa, immersing himself in the country’s diverse beauty and vast opportunities. This experience was not just a break from the corporate world, but a deep dive into the different markets and landscapes of South Africa. His travels, ranging from the picturesque Limpopo to the vibrant Cape regions, allowed him to witness first-hand the potential for development in these areas.
A significant takeaway from Ndlovu’s travels was the identification of township retail as a new growth engine for the South African property industry. His observations in the townships revealed untapped opportunities, particularly in areas with substantial infrastructure development, crucial for investors and developers looking to explore new markets.
Beyond enjoying the scenic beauty of game drives and the culinary delights of the local cuisine, Ndlovu’s interaction with the people on the ground provided invaluable feedback. By speaking with locals as opposed to just top management, he gained a real sense of the community’s needs and the practical challenges faced in these areas. Issues like infrastructure deficiencies in road networks, water supply, and service delivery were highlighted as key factors influencing the property market.
Discussing the intricate relationship between global real estate trends and the South African property market, Ndlovu pointed out that the South African listed market has 50% exposure to international markets, especially in regions like the UK, Australia, and Eastern Europe.
The discussion delved into the evolving trends in the property market post-COVID-19. Notably, the office market has emerged as the least favoured sector, influenced heavily by changing work patterns and the rise of remote working. Ndlovu also highlighted the impact of global interest rates with capital values falling across most markets, with South African markets tracking global markets. An average of 10% increase in the listed sector prices can be seen locally and globally.
The conversation also touched on regulatory changes, specifically Section 28, affecting pension funds, allowing for greater offshore investment. This shift signals a broader trend towards global market engagement, which has substantial implications for local investors and developers.
A critical topic of discussion was the shortage of quality, affordable housing in urban areas. Ndlovu stressed the need for government support and subsidies to address this issue, especially given the rising construction costs of between 20% and 30%. With purchase prices increasing as a result, the rental market has grown substantially as it has become challenging for the first-time home-owner to qualify for bonds.
With office vacancies soaring in some areas, Ndlovu and Paterson examined the potential for converting these spaces into residential units. While this presents a significant opportunity, the high costs associated with such conversions pose a challenge.
The conversation also explored the role of Real Estate Investment Trusts (REITs) in the property market, particularly concerning the conversion of office spaces to accommodation. Ndlovu pointed out the need for a balance between property values and conversion costs, a crucial factor in making these projects viable.
Addressing the broader challenges in the South African property market, Ndlovu identified load shedding as the largest obstacle, leading to increased capital expenditure for property companies. Substantial ripple effects such as loss of trade due to loadshedding is impacting retail, especially smaller centres that don’t have back-up solution. Other factors such as water shedding and interruptions are becoming an increasing threat. Some listed companies have for instance not paid out full dividends as funds are kept in reserve for related infrastructure expenditure. Non-delivery by local authorities remain significant, with landlords having to balance expenditure and the supply of services to tenants.
Despite these challenges, Ndlovu expressed optimism about the property market’s future. Current investment in back-up power solutions will increase the value of buildings in the future. Ndlovu believes that the interest rate is nearing its peak, which bodes well for 2024. Even though global office occupancies are still lagging, he noted signs of recovery and potential growth areas, including the retail market returning to pre-COVID levels and the increasing interest in logistics and industrial sectors. Online retail has impacted the industrial sector substantially, which is a great opportunity for investors and REITs.
Semigration to the Western Cape is having a substantial impact on Cape Town CBD’s office market and rentals and Ndlovu stressed that rhere are multiple opportunities for investors in these growth areas.
The impact of AI and technology on the property sector formed a pivotal part of the discussion. Ndlovu expressed caution regarding the long-term implications of AI on the workforce and the challenges in converting office spaces for residential use, which has its various challenges, not only in terms of costs of conversion but also the design of the building and whether it can in fact be optimally converted.
Ndlovu shared his personal approach to property investment, emphasising the importance of diversification and relying on professional fund managers for stock selection and research. He advised that you have to keep your eye on property trends and take a long-term view on the market you invest in.
So, what is next? Ndlovu and Paterson shifted their focus to the outlook for 2024. They discussed the potential impact of global interest rates, which will take approximately two years to recover from an earnings perspective, local election outcomes, and the anticipated increase in property allocations in balanced funds which are in average underweighted in terms of property. This creates a greater appetite for local and international property investment. Ndlovu concluded with the importance of a long-term view in navigating the market’s volatility.
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