SARB expected unchanged rate decision property neutral, but market likely to continue gradual real correction

Posted On Tuesday, 26 March 2019 14:14 Published by
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In the week ahead, the South African Reserve Bank (SARB) Monetary Policy Committee (MPC) will meet to deliberate on interest rates from the 26-28 March, and FNB expects it to leave its policy Repo Rate unchanged at 6.75%.

 FNB_John_Loos

The all-important CPI inflation rate remains within the SARB’s 3%-6% target range, having recorded 4.1% year-on-year as at February. This means that it lies mildly below the 4.5% mid-point of the target range, following the end of a major surge in petrol price inflation late last year. The Firstrand expectation is that a further 25 basis point repo rate hike may only take place later in 2019.

An unchanged interest rate decision will likely keep the property market gradually “correcting”, i.e. with nominal property value growth rates at very low single digit rates that don’t keep pace with 4-5% CPI inflation, thus declining in real terms.

This gradual correction is less about interest rates, which are still relatively low, and more due to a weak economy where confidence is kept low by the myriad of structural constraints, the most prominent one of late being weak electricity supply.

Business confidence, according to the RMB-BER Business Confidence Index, remained very low in the 1st quarter of 2019, at a level of 31 (on a scale of 0 to 100), implying that only 31% of survey respondents find business conditions satisfactory. This level of confidence represents the 3rd consecutive quarter of decline in this index.

Much of this weak confidence arguably has to do with concerns over the current and future economic policy direction and management of the economy, the latest negative being erratic electricity supply, not a time for strong investment in an asset class such as property.

The 4th quarter growth in Real Fixed Investment in Residential and Non-Residential Buildings is arguably reflective of this weak confidence, declining at quarter-on-quarter annualised rates of -9.6% and -2.8% respectively.

It would thus probably take the 2019 general election to pass smoothly, and hopefully some greater policy certainty thereafter, to bring about a noticeable strengthening in Property investment.

We thus see little support for the market from the SARB putting rate hiking on hold once again. The weakening in Commercial Property and the Commercial Mortgage Lending Sector began well-before the start of interest rate hiking in November, suggesting the economy to be the key influence.

Vacancy rates, according to IPD half-yearly data, began to rise back in 2016 in the case of Office Space and 2017 in the case of Retail Space. Ultimately, less fixed investment, and thus less new space supplied, is part of halting rising vacancy rates and balancing the market. But we don’t believe that we have yet reached a level of building completions low enough for this to happen.

In short, we believe that the SARB’s expected unchanged interest rate decision will be property market neutral, but that other economy-related negatives will keep the market on the “back foot”, correcting slowly in real terms.

Last modified on Tuesday, 26 March 2019 14:24

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