South Africa’s commercial property boom

South Africa’s commercial property sector is potentially entering a boom, with recent optimism surrounding the country’s economy set to boost the value of this real estate sector by over R2 trillion. 

This is according to Gmacen, a provider of real estate software and data services. The company tracks the value of commercial property through data collected on deals in the sector and from municipalities’ annual financial statements. 

Despite the Covid-19 pandemic, elevated interest rates and slow economic growth, South Africa boasts the largest commercial real estate industry in Africa. 

Gmaven CEO Will Harris said a long-awaited commercial property boom could follow if recent reforms persist, interest rates continue to lower, and key metros stabilise. 

The value of South Africa’s corporate real estate (CRE) market reached R1.92 trillion as of 30 June 2023, reflecting a significant 48% increase from the R1.3 trillion recorded in 2015 when official data was first released by the Property Sector Charter Council. 

At an exchange rate of R18 to the dollar, this translates to nearly $110 billion. With an estimated population of 62 million, the per capita value stands at $1,800. This is far lower than the UK, with a similar-sized population of 67 million. 

The UK’s per capita value of CRE is $26,600 – from a CRE market valued at $1.78 trillion. 

“This new data underscores the resilience of South Africa’s commercial real estate sector and highlights opportunities for investment, future growth and strategic decision-making,” Harris said. 

Gmaven’s data reveals that listed property owners hold R400 billion of the R1.92 trillion commercial real estate market. 

Growthpoint Properties reported assets valued at R70.5 billion, followed closely by Redefine Properties at R64.7 billion. 

Excluding the listed sector, the bulk of the market value is held by owner-occupiers, private owners, and pension and life funds. 

High-density metros like Gauteng and the Western Cape account for the largest share of the market. 

Provinces such as Mpumalanga and Limpopo, with lower per capita values due to less formal urbanisation, have experienced recent growth in retail and present future opportunities.

Harris said the R1.92 trillion market value is derived from the annual financial statements of 213 South African municipalities. 

This value is likely understated as it excludes state and municipal-owned commercial properties, hospitals, hotels, schools, and multi-dwelling residential properties. 

“Municipalities rely heavily on property rates and taxes for revenue, making them highly motivated to ensure property values are accurate.” 

“Simultaneously, property owners are incentivised to keep those values in check, as inflated assessments lead to higher tax bills. This dynamic fosters a natural accuracy in the data – data that reflects the entire commercial property landscape of the country,” Harris explained. 

Harris said municipalities may push up the value of CRE properties as they seek to extract more from property owners, placing pressure on property valuers to value higher. 

However, an increase in property value often represents only a paper gain, which translates into higher rates and taxes for property owners. 

Any rise in rates and taxes must be accompanied by improved service delivery to avoid discouraging investment. 

As the Western Cape’s growth and the relative value erosion in other metropoles have demonstrated, property values follow the laws of demand and supply. 

Improved local government service delivery attracts both resident and business rental payers. Property investors follow suit as capital flows into these areas, driving up property values.

However, the inter-country migration mentioned above is largely a zero-sum value game. With a fixed number of businesses and GDP, the value simply shifts between regions rather than driving an overall increase in the country’s total property value. 

The value of commercial properties can fluctuate significantly, even without new construction, driven by property-specific factors and broader economic and market conditions. 

Macro factors that will drive increases in the total value of commercial property are lowered interest rates and the economic growth potential of the Government of National Unity (GNU) coming to fruition. 

The GNU promises to improve local government services and infrastructure, policing and security, foreign policy, the legal system, clarity on property ownership rights, and overall investor sentiment regarding South Africa. 

Micro, property-specific factors dictating commercial property values are driven by their income potential. Properties that generate higher rental income or maintain lower vacancy rates are valued higher.