In the currently low CPI (Consumer Price Index) inflation environment, Firstrand expects the Reserve Bank (SARB) to cut interest rates by 25 basis points at its Monetary Policy Committee (MPC) meeting this week, which would lower the policy Repo Rate to 6.25% and Prime Lending Rate to 9.75%. Should this cut take place, however, we believe it unlikely that it will materially change the “gradually correcting” trend in the commercial property market.

We believe that current property market-related sentiment is driven less by interest rate moves and prospects at present and more by economic performance and perceived future economic growth and stability prospects.

Real GDP growth started its broad multi-year slowdown in 2012, and the multi-year slide in MSCI half yearly all property total returns started a little later in the 2nd half of 2013. This slide has been sustained up until the 1st half of 2019, with interest rates having risen from 2014 to early-2016, peaking at 10.5% Prime Rate, and since having been cumulatively lowered to 10%.

The mild fluctuations in interest rates since early-2014 appear to have made little difference to either the broad stagnating trend in economic growth trend or the broadly weakening property trend, and we wouldn’t expect this week’s expected rate reduction to make a noticeable difference either.

KEY PROPERTY TRENDS THAT WE EXPECT TO CONTINUE IN THE NEAR TERM

• Slowing total returns

MSCI half-yearly data pointed to further decline in total property returns to 3.8% for the 1st semester of 2019, from the previous semester’s 5%. This continues a broad declining trend in All Property Total Returns since back in 2013. This is also the lowest half-yearly total return since the 2nd half of 2009, at which time the country was battling to emerge from a short sharp recession just after the Global Financial Crisis and the 2018 oil price shock.

• Capital Depreciation in real terms

The MSCI half-yearly figures showed half-year-on-half-year capital depreciation of -0.1%, thus negative both in nominal and real (inflation-adjusted) terms in the 1st half of 2019.

Given the low levels of business confidence, even with the expected rate cut this week we remain of the expectation that the trend of real capital depreciation will likely continue into the 1st half of 2020.

• Rising Vacancy Rates and Property Income Growth Pressures

MSCI’s half yearly All Property Vacancy Rate continued its rising trend to reach 6.51% in the 1st half of 2019, up from a multi-year low of 4.18% as at the 1st half of 2016. In a sub-1% economic growth environment we would expect this rising trend to continue for the time being.

Rising vacancy rates should be expected to exert downward pressure on market rental and thus in income growth. On a per square metre basis, as per MSCI Income and Cost Digest Data, base rental inflation was a mediocre lowly 4.7% for the 1st half of 2019, having recorded 6% for the year 2018. This growth rate is down on the 2015 post 2008/9 recession high of 9.1%, battling at the hands of a weakened economy and elevated vacancy rate.

• Mildly elevated tenant financial stress

TPN tenant data points to a mild increase in commercial tenant financial pressure through 2017 to mid-2019. The percentage of tenants deemed to be “in good standing” regarding rental payments to landlords, has declined gradually from a multi-year high of 83.11% in the final quarter of 2016 to 79.9% by the 2nd quarter of 2019.

We expect further decline in this percentage, too, in the near term.