The link between the petrol price and property in South Africa

Motorists filling up with petrol on Wednesday (3 August) will have seen a welcome reduction on their bill, following record highs in preceding months.

Thanks to cooling brent crude prices, both grades of petrol are down by R1.32, diesel 0.05% Sulphur will cost 88 cents less while the price of diesel 0.005% Sulphur will decrease by 91 cents. Wholesale illuminating paraffin will cost R1.44 less with the retail price going down by at least R1.92.

The drop in prices will ease pressure on household finances and cool inflation that’s already breached the top of the central bank’s target band of 3%-6% for the first time in five years in May. Fuel has a weighting of almost 5% in South Africa’s consumer price basket, said Bloomberg.

Gasoline retail costs have surged by 30% since the start of the year, increasing calls by opposition parties and labour groups for the government to deregulate the price. However, the Fuel Retailers Association has warned such a move could result in making it even more expensive for consumers, it said.

John Loos, the property sector strategist at FNB Commercial Property Finance, warned that the fuel price reduction is not yet expected to be sufficient to stop an anticipated weakening in commercial property demand in the second half of 2022, as lagged direct and indirect impacts from earlier fuel price hikes feed through.

“Firstly, this is because there are still ‘second 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,” he said.

FNB’s economics team only expects CPI inflation to peak at around 8% late in 2022.

Loos said that elevated fuel and food inflation has prompted a lift in inflation expectations and, along with expected second-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,” he said.

The strategist said that 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, said FNB.

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,” said Loos. ‘

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, while ‘Clothing Textiles and Footwear’ was 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 by 3.7%.

“The pressure from the earlier global oil and fuel price surge on property markets via the global and domestic economic impact 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,” said Loos.

A negative impact on the country’s trade can negatively impact demand for Industrial Property Space, said FNB.

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 the latest fuel price drop.

“In addition, upward pressure on property capitalisation rates and downward pressure on real commercial property values is still expected in the second half of 2022,” said Loos.

On the residential side, slower new residential development is also expected to continue in the second 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, the property strategist said.


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The link between the petrol price and property in South Africa