Economic Overview 2000

Posted On Friday, 15 February 2002 02:00 Published by
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The South African commercial and industrial property market has faced a tough macro-economic climate for the past two years, with nominal interest rates peaking at 25,5%. The significant slowdown in property-related activity has been much discussed in recent months, but the outlook is increasingly positive.

The South African commercial and industrial property market has faced a tough macro-economic climate for the past two years, with nominal interest rates peaking at 25,5%. The significant slowdown in property-related activity has been much discussed in recent months, but the outlook is increasingly positive. The following overview examines some of the key economic issues of relevance to the property sector for the remainder of 1999 and the year 2000.

South Africa’s tough market conditions should be considered against the backdrop of the international economy. Factors such as the Asian contagion in 1997/98 have resulted in a more cautionary approach to emerging markets in general, despite South Africa’s comparatively successful weathering of the crisis. The outlook for the global marketplace is upbeat, however, and improved growth is expected in both Europe and Asia in 2000.

That said, there have also been several positive factors in the local economy in recent months. The second democratic elections were successful, and the re-appointment of Trevor Manuel to the Finance portfolio was widely hailed as a good business decision. The appointment of Tito Mboweni as Governor of the Reserve Bank has occurred with little market reaction and the handing over of the Presidency to Thabo Mbeki has also been accomplished smoothly.

Without doubt, the key macro-economic issue in 1998 was the sharp rise in interest rates to 25,5%. The SA Reserve Bank itself identifies slow economic activity and high financing costs as the negative factors that determine the real estate market during the past 18 months and points to a year-on-year decline in both the value and number of real estate transactions in 1998. On a more positive note, the average nominal value per real estate transaction showed a nominal increase of almost 4%.

The upside of the interest rate issue has been the maintenance of a low inflation environment, and the Consumer Price Index is expected to remain at single-digit levels for the next two years. This does, however, raise issues for the property sector: downward pressure on rental and operating cost escalations, for example.

Although still at relatively low levels, business confidence appears to have troughed and looks set to rise. This does not appear to have translated into improved economic activity levels, but it does point to market expectations that the business cycle is likely to turn upwards around the end of 1999. Certainly, growth incentives are beginning to appear: the combination of lower inflation, lower finance costs, a lower company tax rate of 30% and an improving global market may kick-start new activity. Low savings levels mean that the economy is, however, likely to remain dependent on foreign capital inflows and thus South Africa’s attractiveness and competitiveness as an investment destination is paramount.

Looking forward, economic growth is forecast to rise to 1,4% year-on-year in the fourth quarter of this year, although not driven by an increase in investment or capital formation.

Forecasts of key macroeconomic indicators







Gross Domestic Product






Private fixed capital formation






Prime Overdraft Rate






Consumer Price Index












Source: BER

These indicators may well indicate a window of opportunity for the property sector.

From the perspective of the building and construction industry, 1999 is likely to represent the trough in the cycle. Forecasts for 2000 are predicting an upturn in new residential, non-residential and construction activity:

Private investment in the building and construction sectors


Residential Building

Non-Residential Building










Source: BER


The industrial property sector may benefit from the slight improvement in manufacturing indicators in the first half of 1999, the result of better export demand and increased price competitiveness of local manufacturers. Manufacturing confidence remains at a low level, although prospects are beginning to look more positive.

For retail property, it should be borne in mind that private consumption expenditure has been constrained by declining formal employment levels, lower income growth and a move on the part of households to repay debts in the face of high interest rates. Declining interest rates should ease this situation, although many economists are predicting a cautious upturn in consumption data. Savings levels remain low and debt ratios remain high. On the upside, the windfall gains to consumers due to the Old Mutual de-mutualization are expected to boost consumption levels.

The office sector may be in line to benefit from the expected improvement in general economic activity in the next year, especially if much of that activity is in the tertiary sector. However, declining employment levels in the formal economy may prompt businesses to become more space-efficient.

Overall, one sector that the property market should monitor carefully for new opportunities is the tertiary, or service, sector. The SA Reserve Bank reports that the tertiary sector now accounts for 65% of value-added to the economy, compared with 55,5% a decade ago. This could hold good opportunities for new space demand, but may result in demand for a different type of space.

Finally, the overall easing — albeit cautiously — in the economy and the property market is indicated by the fact that the BER’s Building Cost Index is forecast to average 4,1% in 2000: a 0,6% change over the 3,5% predicted for 1999. With building costs increasing at the same rate as consumer inflation, and rental escalations at about 10%, new construction activity may be more attractive.

Publisher: JHI
Source: JHI

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