The Three Trends Reshaping
South Africa's Property Market

somaya-joshua-author

Somaya Joshua

Managing Executive for Commercial
Property Finance at Absa

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It’s generally wise to greet claims of a one-size-fits-all solution to complex market challenges with a healthy dose of scepticism.

Yet, it's hard to overlook the macro factors currently moulding South Africa’s property market, each acting as both disruptor and catalyst in a sector that could potentially redefine urban development and economic growth in the country.

This was widely discussed at the South African Property Owners Association (SAPOA) Convention last month, where it became evident that the unfolding dynamics in the local property market are not confined to shifts in physical spaces; they echo across the economic spectrum, influencing policy decisions, investment strategies, and individual choices.

Investors and developers, traditionally quick to adapt to market demands, now find themselves at the forefront of these changes, deciphering complex signals from both global markets and local conditions. This scenario presents a critical test of their ability to forecast and innovate in an environment where historical data may no longer serve as a reliable guide.

Sustainability and Green Building Practices

Research has shown that the proportion of certified new green buildings among new developments has risen sharply, from 7% in 2016 to 32% in 2020 – this growth likely driven by a shift in consumer priorities, as shown by leading indicators like the Absa Homeowners Sentiment Index which finds that homeowners and buyers are increasingly becoming more eco-conscious and making homeownership decisions with the sustainability factor as a key driver.

However, the cost of sustainable upgrades remains substantial.

Developers are caught between the immediate financial burden of green construction and the long-term environmental benefits. The initial expenses can slightly reduce asset yields in the short term, creating a palpable tension. Yet, this investment pays off: green-certified prime office buildings have outperformed their non-certified counterparts, with operating costs also trending lower. This outperformance is driven by higher capital growth, superior net income growth, and a lower discount rate. As a result, the tension between short-term costs and long-term returns highlights a broader market realignment, where sustainability is becoming synonymous with financial resilience.

On the consumer side, strategic partnerships play a key role in democratising market access to sustainable properties. Absa, for example, partnered with the International Finance Corporation (IFC) to support prospective homeowners with the purchase of green-certified homes, with customers now eligible to receive 1.5%-3% of their loan amount back as a rebate.

Remote Work and Shifting Space Demands

In the residential market, buyers are seemingly prioritising homes that can accommodate dedicated office spaces, reliable internet access, and proximity to lifestyle amenities – shifting the focus away from traditionally sought-after locations near business districts. This has led to increased demand in suburban areas, where larger properties offer greater flexibility for home-working arrangements.

On the commercial side, remote work – spurred by increasing employee value propositions – is driving a reassessment of office space requirements. SAPOA’ latest office vacancy survey found that the local office segment recorded its eighth consecutive quarter of improving vacancies in June, with the largest improvement in Prime or P-grade offices, while rental reversions continue to narrow. It’s evident then that prime locations that offer adaptable, high-tech workspaces are expected to retain value, highlighting a shift from sheer square footage to the quality and adaptability of office environments. This demand will shape future real estate investment strategies.

E-Commerce and the Transformation of Retail Real Estate

While the growth of e-commerce has undeniably disrupted the traditional retail real estate landscape, recent data suggests that brick-and-mortar retail still plays a critical role in South Africa. According to Lightstone, retail property accounted for nearly 30% of total commercial property transactions last year, with an estimated value of R15.8 billion—the highest volume of transactions across commercial sectors.

However, this doesn't negate the impact of e-commerce on the broader retail market.

Many retailers are adopting hybrid models, using physical stores as both showrooms and distribution points, enhancing their ability to meet the demands of digital consumers. Meanwhile, industrial properties, such as warehouses and last-mile delivery hubs, are experiencing increased demand as the e-commerce sector grows, particularly in underserved areas like townships and rural regions.

Sustained positive operating performance in well-located, dominant centres and those with a higher share of non-discretionary spending offers potential for improved loan-to-value (LTV) capacity in this sector. Coupled with the ongoing rate reduction cycle, which lowers the cost of debt, these factors create a favourable landscape for growth and profitability in retail real estate.

As these macro factors continue to evolve, the ability to anticipate and react to new developments will distinguish leaders from laggards in the race to capitalise on these changes.

somaya-joshua-author
Somaya Joshua

Managing Executive for Commercial Property Finance at Absa

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