This property sector in South Africa is heading to R2 trillion – and could hit it soon

The South African commercial real estate market has surged to nearly R2-trillion, and if reforms persist, interest rates continue to lower and key metros stabilise, a long-awaited commercial property boom could follow.

This is the data and view provided by Gmaven, a provider of real estate software and data services.

Despite the Covid-19 pandemic, inflation-fighting interest rates and slow economic growth, South Africa continues to boast the largest commercial real estate (CRE) industry in Africa.

According to Gmaven, the value of South Africa’s CRE market reached R1.92-trillion as of 30 June 2023, reflecting a significant 48% increase from the R1.3-trillion recorded in 2015 when official data was first released by the Property Sector Charter Council.

“This new data underscores the resilience of South Africa’s commercial real estate sector (particularly the industrial and retail categories) and highlights opportunities for investment, future growth and strategic decision-making,” said Will Harris, CEO of Gmaven.

However, Harris said the R1.92-trillion market value is derived from the annual financial statements of South African municipalities thus this value is likely understated.

This is because it excludes state and municipal-owned commercial properties, as well as hospitals, hotels, schools, and multi-dwelling residential properties. Further, municipal commercial property values often fall below market value.

“Municipalities rely heavily on property rates and taxes for revenue, making them highly motivated to ensure property values are accurate,” said Harris.

“Simultaneously, property owners are incentivised to keep those values in check, as inflated assessments lead to higher tax bills [and] this dynamic fosters a natural accuracy in the data – data that reflects the entire commercial property landscape of the country,” he added.

Regardless, looking at the R1.92 trillion figure, with an exchange rate of ~R18 to the dollar, South Africa’s per capita CRE value is ~$1,800 (R32,800), lower than the UK’s ~$26,600 (R485,270) with a similar population.

According to the data, listed property owners hold around R400 billion of the R1.92 trillion CRE value.

South Africa’s largest listed property fund, Growthpoint Properties, reported assets valued at R70.5 billion, followed closely by Redefine Properties at R64.7 billion.

Gmaven noted that, aside from the listed sector, most market value is held by owner-occupiers, private owners, and pension/life funds.

High-density areas like Gauteng and the Western Cape dominate the market, while provinces like Mpumalanga and Limpopo, with lower per capita values due to less urbanisation, have seen recent retail growth and offer future opportunities.

Why the commercial real estate value is important

Gmaven said that grasping the value of South Africa’s commercial real estate market is essential for a variety of economic decisions, from infrastructure spend, to rental projections, taxation, and energy consumption.

Harris said understanding the true value of South Africa’s commercial real estate market is essential for businesses, policymakers, and investors.

“By gaining a comprehensive understanding of the R1.92-trillion CRE market, businesses can make more informed decisions, municipalities can optimise revenue management, and major economic actors can strategise for sustainable growth,” said Harris.

To effectively analyse CRE market value, the Gmaven CEO said that it is important to consider properties by grade (Premium, A, B, or C-grade), category (office, industrial, retail and other), and size or gross lettable area.

Municipalities and the competition for “customers”

Harris warned that municipalities may inflate the value of CRE properties to extract more from owners, pressuring valuers to set higher valuations.

While this can lead to higher rates and taxes, it often results in only a paper gain for property owners.

He said that to avoid stifling investment, any tax increases should be paired with better service delivery.

As seen in the Western Cape’s growth, property values are driven by supply and demand. Strong local government services attract residents and businesses, which in turn boost property values.

However, inter-country migration is largely a zero-sum game, with value shifting between regions rather than contributing to overall national property value growth.

How to increase property value?

Harris said that commercial property values can fluctuate due to both broader economic conditions and property-specific factors.

On a macro level, lower interest rates and the potential economic growth from the Government of National Unity (GNU) could boost South Africa’s commercial property market.

He said that the GNU’s promises to improve local government services, infrastructure, security, property rights, and investor confidence are key drivers for value growth.

At the property level, income potential plays a crucial role. Properties with higher rental income or lower vacancy rates tend to be valued higher.

Innovative revenue streams, such as solar panel installations that generate electricity for sale, can also increase a property’s value.

Additionally, reducing operational costs, including rates, security, and management, boosts profitability and drives up value.

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