4 ways the petrol price drop is good for property in South Africa

South Africa’s fuel prices are set to fall by the most in two years on Wednesday (7 September), increasing the chances that inflation may be near a peak, reports Bloomberg.

The Department of Minerals and Energy announced on Monday that domestic fuel prices will be reduced considerably effective from Wednesday, and represents a second successive month of drops for fuel in the country.

Both grades of petrol will decrease by R2.04 cents per litre while diesel (0.05% sulphur) will decrease by 56 cents.

For the 95-octane variant, that’s a drop of 8% from August, the biggest monthly percentage decline since early 2020, when crude fell to record lows as demand plummeted due to worldwide lockdowns aimed at curbing the spread of Covid-19, said Bloomberg.

The wholesale price of diesel – used in agriculture and for emergency power generation – will drop by 56 cents per litre, while the maximum cost of illuminating paraffin, used by many for cooking and lighting, will decline by R1.09 per litre.

FNB property lead John Loos said that the local property market should quietly celebrate oil prices being well-off recent highs and that domestic petrol prices are coming down.

“The oil price spike in 2008, where Brent Crude touched $150/barrel, was, in our view, the main cause of South Africa’s pre-2008 housing bubble bursting. Oil price shocks normally cool the world economy significantly, often causing a global recession – the 2008 one causing food price inflation too as markets feared that increased ethanol crop planting would crowd out food production,” said Loos.

The cumulative result in the run-up to the 2008/9 crisis was double-digit increase in inflation and 500 basis points’ worth of interest rate hikes by the South African Reserve Bank.

“That was too much for the highly indebted household sector, South Africa’s residential market experienced severe pain, while commercial property markets experienced very significant weakening,” the strategist said.

As a result, the indirect link between oil/petrol price movements and property markets can be a very strong one. A cheaper petrol price is good for the property market in a number of ways, stated Loos.

“Granted, petrol is still expensive, and as such still keeps transport costs high, but every price cut helps.

“Firstly, price reduction is important in containing the magnitude of future interest rate hikes. FNB expects consumer price inflation to peak late this year at near 8% – so we appear close to the peak at 7.8% CPI inflation in July – and interest rates to reach their peak late this year at a level where prime rate is 10.25%,” he said.

Petrol price reductions are important in seeing to it that the inflation and interest rate peaks are indeed not far off, said Loos.

“However, we believe that such peak levels will probably be too late to prevent slowdowns in buyer demand in all of the major categories of commercial property (retail, industrial and office) as well as residential development levels, in the latter half of 2022.”

Secondly, petrol price reductions begin to ease the pressure on the work commuting population. Staff working in offices have been feeling the financial pain of commuting in recent months, and this may have led to a greater number working more from home than may have been the case in a scenario where petrol prices had remained low all along.

Loos said that office landlords are likely to cheer the latest petrol price reductions, which could motivate certain companies to retain their office space as opposed to downscaling it.

“In an era of greater work from home, it is difficult to tell what impact high petrol prices alone have had in keeping people working at home, and thus motivating some decline in office space demand; however, we think at present office landlords would desire higher weekly office attendance rates which could possibly drive less downscaling of space requirements than would otherwise be the case.”

Thirdly, for retail property, petrol price reductions lessen the need for consumers to reprioritise consumer spend away from shopping centres in order to pay for a larger fuel bill, said Loos.

“We’ve seen this process of reprioritisation of spend towards paying petrol bills as a negative for a regular retail centre, because this is towards spending on an item outside of a retail centre.”

“Finally, we believe that recently high petrol prices may have slowed the post-lockdown pace of recovery in both holiday and business travel, and this, in turn, may have had implications for a battling hotel property sector.

“Lower fuel prices would surely be welcomed by the hotel property sector, providing some mild additional support hotel incomes via boosting travel demand. However, to be meaningful, a few more petrol price reductions are probably needed.”

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