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South Africa’s property market is facing a challenging time, with shopping centres struggling amid declining sales.
According to Rode’s latest capitalization (cap) rate survey for Q4 2023, South Africa’s property market remains under pressure, as cap rates for office, industrial and retail were still up (worse) compared to pre-Covid levels.
The cap rate is calculated by dividing a property’s net operating income by the current market value. A higher cap rate indicates a riskier investment.
“The retail property market struggled in 2023, with sales in negative territory after deducting inflation. Mall vacancy rates also remain above pre-pandemic levels,” Rode said.
“Therefore, it is no surprise that cap rates averaged higher than in 2022. However, cap rates improved towards the end of the year.”
The cap rates of regional shopping centres (the second-largest type of mall with between 50,000 and 100,000 sqm of rentable space) averaged 9.7% in Q3 and dropped to 9.5% in Q4 – up from 8.9% in 2022.
This was due to the weaker performance of the retail market in 2023 compared to the previous year, with Stats SA data showing that real retail sales dropped by 1.5% in the first ten months of 2023.
Although mall vacancy rates for all sizes improved from 5.6% in Q2 to 5.1% in Q3, this was still above the pre-pandemic levels of 4%.
In addition, despite most of the major cities seeing lower (better) cap rates in Q4, the national-weighted regional centre cap rates remain higher than those in 2019 (7.9%) and 2022 (8.9%).
On a national level, the cap rates for smaller communities (between 12,000 and 25,000 sqm of rentable space) and neighbourhood centres (between 5,000 and 12,000 sqm) averaged 10,2% and 10.7%, respectively – both lower (better) than Q3 2023.
“However, since cap rates from quarter to quarter often correspond to a random walk, we should not read too much into these tiny movements,” Rode said.
That said, the year-end improvement in cap rates came after two consecutive quarters of higher (worse) cap rates.
According to the latest Bureau for Economic Research (BER) Retail survey, the percentage of retailers satisfied with the prevailing business conditions increased from 32 in Q3 to 47 in Q4 – the highest reading since Q3 2022.
The BER said that this was not due to sales growth, with an improvement in profitability and general business conditions – with load shedding improving at the time of the survey – increasing confidence. However, the economists warned that the picture was not looking bright for this year.
“High inflation and interest rates have reduced the purchasing power of consumers, and retail sales volumes will likely disappoint compared to the same quarter (Q4 2023) of last year,” Craig Lemboe, deputy director at the BER, said.
“With cost-of-living pressures projected to remain high in the near term, business conditions will remain challenging in the trade sector during the first half of 2024.”
Read: Outrageous predictions for 2024 – including an AI deepfake crisis, and the fall of capitalism in the USA
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