15 March 2022

 

Four weeks ago, the whole world was fairly, on a positive note of recovery…and wouldn’t have thought that we would experience the current changes, which we are. Through all our thoughts and questions, SAM COHEN decided to see, what the experts have to say about the property market happenings, but also, sharing the discovery, of a possible blessing in disguise which our country can use to its advantage.

 

There is no doubt, that COVID-19  has completely changed the global property market and despite an uneven recovery, investments in international real estate have reached an “all-time high” in the third quarter of 2021, topping $755 billion, ( 670 euros), up 50 percent year-on-year, whilst investors stuck to  diversified portfolios, with residential sectors being the most active segment , ahead of offices, driving 29 percent of transactional activity, according to  Euronews.com, at the end of 2021.

 

According to Knight Frank’s Q4 Global House Price Index, house prices increased by 10.3% on average annually, with Turkey taking the top spot in unadjusted terms at 59.6% . For the year to the fourth quarter, there was an average increase in the price of a US home in 2021, while three international markets recorded a price decline for 2021 with Malaysia at 0.7%, Malta at 3.1% and Morocco at 6.3% .

Globally , the report anticipates a year of more reserved growth for 2022, due to mounting factors including the crisis in the Ukraine, coming off the back of a global economy which is yet to fully recover from the COVID-19 pandemic.

 

In an property24 article (www.property24.com)  earlier this month, John Loos, a Property Strategist at FNB Commercial Property Finance, said that it is too early, and the future path of the conflict is too uncertain, to say with any confidence what the magnitude of the economic and property market impact in South Africa could be. However, there are some seemingly obvious potential impact points on the domestic property market via the economic impacts, Loos said. Also, he went on to say that the conflict appears likely to add to already troublesome global inflationary pressures, notably energy prices and that potential energy supply disruptions in the region, in part, as a result of the conflict but also due to potential sanctions and boycotts against Russia, a key oil and gas producer, have sent energy prices rising significantly.

 

Loos’ opinion continues :

When it comes to the property-economic impact: Upside inflation, this upside interest rate risk, and downside economic growth risk, are the basic macroeconomic risks that appear to emanate from the Ukraine War, the magnitude of which is highly unpredictable.

Captialisation ( Cap) Rates’ wise : Given the partial link between short term interest rate and long bond yields on the one hand, and property capitalization ( Cap) rates on the other, some negativity around inflation prospects as a result of the Ukraine conflict led to some sell-off of South African Government bonds, with the average yield for 10-year bonds having risen from 9.26% as at the 25th of February to 9.665% on the 4th of March 2022.

Vacancy Rates: “ After recent years of rising average vacancy rates, in all 3 major commercial property markets

( Industrial, Retail and Office), our recent FNB Property Broker Surveys late in 2021, were pointing towards a possible stabilization in retail and office vacancy rates and a decline in industrial property vacancy rates, supported by some recovery in the economy flowing the sharp 2020 GDP contraction. “  

When it comes to the potential Residential Rental Market impact, Loos said that it is tough to call, as it depends on how big the magnitude is. Mild additional upward pressure on interest rates, over and above what would have been the case, could see additional impetus, provided to the expected rental market recovery. Too big an inflationary and interest rate impact exerts financial pressure on tenants, and then all bets of recovery in this market are off. Therefore, it’s a fine balance.

 

For property, the main potential impact points are via upward pressure on cap rates, upward pressure on vacancy rates, downward pressure on rentals and thus property incomes, as well as possible additional upward pressure on operating costs, Loos concluded.

 

 

But, when we look at the past century, through most of the adversaries the world has gone through, most of the time,  they were accompanied by a recession.

The probabilities of one is low, but not negligible, according to John Wyn-Evans, Head of Investment Strategy, Investec Wealth & Investment Uk. The main fear is that central banks will have to lean more heavily on inflation and therefore induce a recession “ on purpose”. Wyn-Evans says that there is plenty of current comment saying that the only way to beat inflation, is to create a recession, because demand needs to be brought back in line with supply. Even then, there are still huge uncertainties about the extent to which supply will normalise, following the disruptions to logistics chains and labour markets that we have experienced.  ( for the full article , follow the link :Geopolitics: the Less You Know - by John Wyn-Evans

 

However, there might be light at the end of the tunnel for South Africa. Professor Brian Kantor, of Investec Wealth & Investment, is of the opinion, that the global rise in Inflation and geopolitical forces, have created an opportunity set for South Africa’s mining sector. He says, that with a proper enabling environment, the mining sector and the country as a whole, can benefit even more than it currently is.

In an article that was released yesterday morning by Investec, Professor Brian Kantor, said that the surge in inflation worldwide has been helpful for South Africa. Higher prices for our mostly metal and mineral exports have boosted the profits of our miners by means of taxes and royalties collected.

He also said that in real terms, represented by ratio, that these price trends have never been more helpful to the sector. In his article he shed light on the Mining’s share of GDP and real mining prices, as well as on the Industrial commodity and metal prices. What is very interesting under the Capital and exploration activity in SA mining paragraph, is the most promising opportunities he refers to in the exploration and development of gas and oil. Important recent discoveries have been made off the Southern Coast. Even more significant, oil and gas have been discovered on the maritime boundary of Namibia and South Africa. The Venus 1 discovery made by Total, is the largest ever discovery of gas and oil in South African waters, which he says is a further opportunity, whilst the Kudu gas prospect can still be realised, Professor Kantor adds.  “ The opportunity for Europe to replace Russian gas and oil with South African resources – closer to Europe than Siberia – should be promoted actively…. What is needed is a mining and exploration agenda for growth, that is, an internationally competitive set of regulations and enabling environment that encourages the miners and drillers to get on with bringing valuable resources to the surface. They need to be introduced without distractions and diversion that often complicate and delay development. “ Lastly , Prof. Kantor ads, “ Achieve growth, and the transformation of the opportunity set, for all South Africans, will follow – Cape diem “.

( for the full article, follow the link : Seizing the mining moment - Prof Brian Kantor - Investec )