FNB commercial property finance economist, John Loos, says that recent events appear to have played into the hands of the Western Cape Province, setting it up for future economic growth and prosperity.
Speaking at a quarterly property market briefing this week, Loos said he believes that the Western Cape province could be the likely outperformer in the near term. He bases this expectation on the belief that the Western Cape’s ability to attract semigrant skills and purchasing power – crucial for economic growth – has recently been enhanced.
“The Western Cape has been the most popular semigration destination for many years now, due to the perception of the province as having a great lifestyle coupled to significant economic opportunity. It has also been seen to be a region where provincial and local government is relatively well-run.
“And as time has passed, communication and information technology has enabled businesses and individuals to be more removed from the major economic hub of Gauteng,” he said.
This semigration movement has picked up during the Covid-19 pandemic, as many professionals were able to work remotely, from anywhere.
Ex-Gauteng residents and semigrants from other South African provinces are buying more properties in the Western Cape than ever before, said Alexa Horne, managing director of Dogon Group Properties.
She said that while semigration to the Cape is not a new trend, numbers have risen sharply due to the pandemic – making it easier for professionals to live, work and play in their preferred province.
“The allure of the Cape has long been pulling professionals who in the past would commute to Gauteng in the week for work and return to their families in the Western Cape each weekend. The need to keep working away from the family and to commute was a draw-back and a reason that more people were not relocating to the Cape.”
Now, remote working, online work logins, Google Meet, and Zoom have made it so much easier for families to pursue their dream of moving to Cape Town, said Horne.
More recently, the unrest and looting in KZN and Gauteng, Loos believes, may have enhanced the appeal of living and doing business in the Western Cape, a province that largely escaped that event.
In addition, the City of Cape Town is one of the only major metros to emerge from the recent local government elections with its ruling party having a clear majority, and thus free of the uncertainty of coalition politics.
Picking up on this trend, the Western Cape is stepping up efforts to attract skilled workers, as it aims to position the city of Cape Town and the rest of the province as a remote-working destination.
Wesgro, the province’s official tourism and investment promotion agency, has partnered with relocation experts Day1 to encourage remote workers to move to the area in the short and long term.
“There is an abundance of opportunities in Cape Town and the Western Cape, from the vibrant tech sector and connectivity to the cosmopolitan network of professionals from around the globe, making this the destination for those who want to work, while also living a little,” said Wesgro chief executive Wrenelle Stander.
“Our world-class infrastructure, universities and skill-sets spanning diverse sectors make us the perfect destination for remote workers this summer and beyond,” said the province’s minister of Finance and Economic Opportunities, David Maynier.
“We will be doubling down and doing everything we can to drive economic growth and job creation in the Western Cape. Looking forward, we will be focusing on five key priorities: ease of doing business, investment and export promotion, enterprise development, skills development and energy resilience,” Maynier said.
FNB forecasts real GDP growth to slow back to its pre-Covid-19 pedestrian rates following the 2021 post-lockdown surge. After an expected 4.7% growth in 2021, the result of an extremely low lockdown base created in the deep recession of 2020, 2022 is expected to see growth taper once more to 2.2%, and then further slowing to below 2% in the years thereafter.
South Africa, it said, has a well-documented myriad of structural constraints, severe capacity limits in the broader public sector and its parastatals, ageing infrastructure, and ongoing capital expenditure weakness in that sector, being but two broad weaknesses to mention.
The recent erratic electricity supply, and another severe hike in electricity tariffs being requested, is but one visible critical constraint on growth in the economy, said Loos.
The South African Reserve Bank (SARB) has also started its interest rate hiking cycle – interest rates become a further mild dampener on demand in what is a highly credit-dependent market.
Loos said he believes that the SARB will “go easy on us” with interest rate hiking, mindful of how fragile the economy is. FNB thus only expects two 25 basis point interest rate hikes in 2022 following last week’s first hike in the current cycle.
Longer-term interest rates are expected to continue their multi-year “upward drift”, according to Loos, influenced by short-term interest rate rises along with a high and further rising level of the government’s debt-to-GDP ratio driving government long bond yields higher.
Industrial in the “relative pound seats”, while office and hotels will remain underperformers
When examining the major individual property classes, Loos believes that the office and hotel property markets will remain the underperforming markets, and could still see some further nominal value decline.
By contrast, he believes that the industrial property class and to a lesser extent retail property will see low positive nominal capital growth.
Industrial property, he noted is the most affordable property class and arguably the most adaptable, while also benefiting from a gearing up of the logistics sector for greater levels of online retail. “Relatively speaking, therefore, this class has quite a bit going for it, it would appear,” he said.
Hotel revenues and occupancy rates remain far below pre-Covid 19 levels, and Loos believes that, while foreign tourists will filter back in larger numbers in 2022, this won’t yet be at the pre-lockdown levels.
Furthermore, he believes that a large part of daily business interaction has been permanently “Zoomified”, and a portion of corporate business travel won’t be coming back.
The office market is expected to see its national average vacancy rate continue to climb in 2022, as many companies revise their office space needs down, the economist said.
Much has been made of the remote work surge, and Loos believes that this is a key dampener of demand for office space.
“As lockdowns ease and economic activity normalise, many have gone back to their offices. But I believe the level of office working won’t go back to the same levels as before the lockdowns, and as technology continues to improve, so the multi-decade trend towards greater remote work levels will continue,” he said.
Loos said that people often overlook two other sources of pressure on demand for office space. The first is the normal recession effect, which caused a major drop in employment numbers in the office-bound sectors of the economy. This means that, even without any increase in remote work, there are fewer employees in these services sectors, which implies less office space needed.
The trend towards improved utilisation of desk space seems to have picked up speed of late, with the “hotelling” of desk space being the buzz, he added.
Hotelling refers to a desk booking system, meaning that employees either book a desk for a day or they don’t have one.
“Gone are the days when every employee had a desk reserved for themselves, meaning a large portion of desks standing empty much of the time. This sharing of desk space will further reduce the need in the coming years for office space,” said Loos.
Residential rental market
Loos also expects that the residential rental market will turn stronger in 2022. This market has been under quite severe pressure in recent times, partly due to the negative impact on tenant finances and payment performance that the 2020 recession had, but also due to early-2020 interest rate cuts spurring many aspirant first time buyers.
Loos believes that this left a gap in the rental market. He said that the onset of rising interest rates is likely to do the opposite, causing a portion of aspirant buyers to put buying on hold and rent instead.