Firstly, this is because there are still “2nd round” inflationary impacts to feed through that emanate from the prior extreme fuel price increases up until early July. Secondly, at present there are also other sources of troublesome inflationary pressure, notably from a surge in food prices. Therefore, FNB’s economics team only expects CPI inflation to peak at around 8% late in 2022.
Furthermore, elevated fuel and food inflation has prompted a lift in inflation expectations and, along with expected 2nd round effects, strengthened the risk of structurally higher inflation. In line with this, interest rates have been rising and FNB currently expects a further 100 basis points’ worth of interest rate hiking to where prime rate reaches 10% in 2023
And finally, even following the mild fuel price decline, price levels will remain exorbitant at a Gauteng pump price of R24,99, which along with rising general inflation and interest rates exerts considerable financial strain on consumers and businesses alike.
Therefore, with regard to retail property, we still expect consumer expenditure to remain “reprioritised”, in order to afford high petrol bills and higher interest bills, and for this to remain a negative for retailers and retail centres focusing more on non-essentials as well as low frequency “postponeable” items. Many of these centres may be the larger regional size categories, while the smaller neighbourhood and convenience centres may be less affected.
StatsSA retail data had been showing fuel sales growing by a very strong 26.6% as at May 2022, and this was likely even stronger in June/July, given further fuel price inflation. This must have taken a noticeable bite out of consumer’s wallets and away from shopping centres. Certain low frequency postponeable spend categories also hinted at support for our view of reprioritisation of spending as at May, “Hardware, Paint and Glass Product Retail”, which relates to home maintenance and improvements and is often postponeable, declining year-on-year by -6.8% year-on-year in real terms, “Clothing Textiles and Footwear” down by -4%, and “Home Furniture and Appliances” down -0.3. By comparison, the more stable and essential “General Dealers” category, where food and grocery shopping largely resides, was still growing positively by +3.7%.
The pressure from the earlier global oil and fuel price surge on property markets via the global and domestic economic impact (some major economies even fearing recession) has also likely not entirely fed through yet, and indeed the July Manufacturing Purchasing Managers’ Index pointed to some negative impact that is likely in part due to the earlier oil price surge. A negative impact on SA’s trade can impact negatively on demand for Industrial Property Space.
The effect of both recently rising interest rates and further expected ones, in response to the inflation surge, along with added economic pressure, all in part influenced by global oil and fuel price hikes, are still therefore expected to lead to slowing property sales activity in all major commercial property sectors in the current half of 2022, despite tonight’s fuel price drop. In addition, upward pressure on property capitalisation rates and downward pressure on real commercial property values is still expected in the 2nd half of 2022.
In short, while tonight’s fuel price drop hopefully signals the end of the series of extreme petrol price increases prior to this month, we don’t believe that the full impacts of the prior fuel price hikes on the property market have yet been felt.
Finally, on the residential side, slower new residential development is also expected to continue in the 2nd half of 2022, but the residential rental market is expected to continue its further mild strengthening, buoyed by a portion of aspirant home buyers postponing their purchase and renting while waiting out the interest rate hiking cycle.
Source: FNB
