South Africa’s residential sector has shown resilience amid slow economic growth, rising interest rates and inflation, with national house prices remaining stable despite challenges.
Sesfikile Capital Executive Director & Portfolio Manager, Kundayi Munzara commented: “We expect rentals to continue growing over the next 12 to 18 months, however, this growth will not meet or exceed inflation levels. From a pricing perspective, the prospects are positive given improved confidence in the SA economy and potential interest rate cuts.”
Munzara said following five years of underperformance, SA’s listed property sector was the best performer in 2023 delivering 10.7% annual returns. For the first six months of 2024, the listed property sector has delivered around 9% in returns – once again leading the pack.
For this reason, there is greater appetite from institutional investors and pension funds to increase their investments in the residential sector, especially the affordable housing segment.
“Many pension funds realise this segment of the market has been under-funded and investing in this space meets both their investment and ESG (environmental, social and governance) objectives,” he said.
Maphefo Sipula, Head of Research and Impact Management at Property Point said the residential sector, valued at R6.8-trillion, is evidence of its economic importance and it reflects the size and appetite for investment due to growing demand for housing because of rapid urbanisation.
“The residential sector has shown resilience, and we expect the market to continue growing in the next 12 to 18 months given the anticipation in rate cuts. National year-on-year house price inflation has remained stable at 3.22% and this bodes well for the sector overall,” said Sipula.
However, she said the asset class remains volatile given its dependence on the consumer which is influenced by several economic factors resulting in increased vacancies which could deter Real estate investment trusts (Reits), institutional investors and pension funds.
According to Miguel Martins, Market Analyst and Property Investor, a reduction and stabilisation of interest rates would result in overall improvement of the residential property market and increase demand, making the sector attractive for investors.
“With the expectation of a drop in interest rates of 1.00% by mid-2025 – the residential market will see increased activity driven by buyers waiting for a ‘cheaper’ interest rate environment – and banks will also increase lending as their bad debt books stabilise,” he said.
Martins said higher interest rates increase the cost of mortgage lending making it less appealing to purchase or refinance property. The high borrowing costs also limited investors’ affordability.
He said a stable political environment and reliable infrastructure all bode well for the residential property market. For example, good governance and reliable infrastructure in the Western Cape has contributed to strong house price growth despite a high interest rate environment, while in KwaZulu-Natal and Gauteng, house prices have stalled.
Munzara said residential property rentals are sensitive to growth in employment and wages, and this will remain long-term drivers of the sector.
“In the short-term we believe the level of oversupply in key metros such as Johannesburg and parts of Cape Town will take a few years to reduce, fortunately, higher borrowing costs and building cost inflation are likely to lead to less construction of new residential buildings, thus bringing supply and demand back in balance,” said Munzara.
Sipula said well-planned and accessible locations will continue to see demand for sustainable housing as more young people move to cities in search of job opportunities and better lifestyles.
“As Property Point, we believe that SMMEs are also a critical driver of growth within the residential property market that is often overlooked, particularly in driving innovation around sustainability and affordable housing to deal with the backlog and shortage of housing in the county.
“It is important to note that the growth of the sector is dependent on economic and political climate and the low economic growth, high interest rates, high cost of living, unemployment, energy and water crisis and infrastructure deterioration continue to be a challenge, slowing the growth of the sector, “ she added.
