Signs that price movement, which appear to be driven by underlying demand with little evidence of speculative activity, are instilling confidence in South Africa’s property sector. Despite a sluggish local economy, residential and commercial prices are appreciating at a pace higher than GDP but are comfortably on par with lending rates, while financing for the sector has proven comparatively stable. The scope for potential growth in each segment varies, unsurprisingly, but broadly-speaking the sectoral outlook for the near term is fairly robust, provided it can manage softening macroeconomic fundamentals and continue to benefit from improvements in related sectors, such as personal finance.

The listed property sector, which saw 8% growth in 2013, should remain above inflation growth for 2014. On the back of fears of further rand weakening and in a bid to benefit from the double-digit growth rates witnessed in a selection of burgeoning markets on the continent, there is a trend towards further offshore exposure, with an increasing number of Africa-focused property funds launching. “We find ourselves more and more giving advice to local and multinational corporates looking to set up offices in sub-Saharan Africa,” said Ndibu Motaung, head of research at JLL South Africa.


Main indicators point to a fundamentally solid and well-balanced residential market. First National Bank (FNB) forecasts housing price inflation for 2014 to reach 9%, an increase from 6.8% in 2013. With the prime-lending rate (9%) approximating housing inflation, the temptation to borrow to invest for speculative purposes should be contained. This is being reflected in the majority of new sales qualifying as needs-based purchases, with only around 9% of sales classified as “buy to let” compared with 25% during the property boom that took place in the early 2000s at a time when housing prices were rapidly appreciating by 20%. Banks’ appetite for risk is also much lower than it was before the recession, with more diligence being undertaken over whom is lent to and under what conditions.


South Africa’s property market is highly credit-driven, making interest rates and consumer debt levels important factors to monitor over the possible threat of another housing bubble forming. The consumer-debt-to-disposable-income ratio slightly exceeds 74%. According to Jacques du Toit, a senior property analyst for the South African bank Absa, banks would be more comfortable if this fell to 65%, as deteriorating financial positions are contributing to impaired credit records, which were up to 48% for 2013 compared with 36% in 2007. “As a financial institution, there are less people in good financial standing that we can do business with,” he stated.

External pressure from a national credit regulator focused on reining in unsecured lending, combined with internally driven controls, are leading to heightened bank scrutiny with respect to how and to whom they make loans. “In the past, homebuyers would be granted up to 100% of the purchase price through loans at mortgage rates discounted to prime. Today, this is no longer the case,” said Du Toit.

In recent years, interest rates were cut to all-time lows to stimulate the economy and spur household consumption. For successive quarters, despite inflation hovering at the cusp of the upper limits of the 6% target band, South Africa’s Reserve Bank (SARB) had kept the prime rate unchanged at 5%, but hinted that incremental increases of 0.25 to 0.5 percentage points would eventually be in the cards. Indeed, 2014 has seen a 50-basis-point hike in January and a 25-basis-point rise in July, with the current rate at 5.75%. “While 75 basis points might not seem like much, because most properties are purchased through loans, psychologically speaking any anticipation of rate hikes causes worry amongst buyers that mortgage financing, and in turn property as a whole, will become less affordable,” said Du Toit. John Loos, a property strategist for FNB, agrees, telling OBG that “anyone considering taking on a bond at the limit of what they can afford will be hesitant to do so to avoid committing to a mortgage that is likely to have higher rates later on”.

However, lenders appear willing to extend credit for home purchases, which is significant at a time when banks in South Africa are generally pulling back on their loan activity. According to a late January 2014 report from Standard & Poor’s, local banks are likely to rein in credit to some segments, such as longer-term and larger unsecured loans, but overall lending activity is set to increase by as much as 8%, supported in part by residential mortgages.

The Price Factor

Exogenous factors are altering the dynamics of the residential market, which is increasingly exhibiting traits of other highly urbanised OECD markets. With muted GDP and income growth, a falling currency and rapid inflation in key purchasing categories such as transport and utilities, South African households are seeking to save money where they can, and this is having an impact on property type preferences. According to Absa’s Du Toit, 70% of newly built dwellings since 1994 have been in the form of smaller (less than 80 sq metres), higherdensity flats and townhouses. Initially this transition had much to do with safety concerns and a desire to move into more secured gated communities. But as the crime rate continues to stabilise and perceptions improve, the move away from freeholds is motivated by price as much as security.

Neil Gopal, CEO of the South African Property Owners Association (SAPOA), explains that the shift towards sectional title dwellings is also driven by the desire to minimise running costs. Given that there is greater ease in providing municipal services in areas where infrastructure already exists, councils will tend to charge lower tax and utility rates in more densely populated areas. This is prompting developers to knock down large dwellings and convert the site into multiple units or build upwards.

The impact of this trend can be seen in the types of accommodation where growth is unusually robust. According to Loos, student accommodation and retirement villages constitute two property types in which he is observing demand outpacing supply and long waiting lists. “While not at the levels of say Japan, we have an ageing population. This demographic might not be a huge cohort, but is the single cohort that is growing the fastest.”

Conversely, when identifying a property type in decline, Loos cited domestic holiday homes. FNB’s Estate Agent survey estimates total holiday buying to be in the 3% region of all sales, down from the 5% range seen in 2007 prior to the financial crisis.

Move To The Middle

FNB releases a quarterly Home Buying Estate Agent Survey that gauges agents’ perceptions and expectations of residential activity. The survey segments home purchases into highnet-worth (average house price of R3.7m, $350,390), upper income (R2.66m, $251,902), middle income (R1.37m, $129,739) and lower income (R884,975, $83,807). In the first quarter of 2014, the middleincome segment emerged as the best performer among the four groups, displaying the highest activity rating, the lowest time on market and the highest percentage of agents citing stock constraints.

The survey also captures whether sellers were doing so to up or downgrade their property, with a noticeable feature being an increase in the percentage of lower-income sellers doing so to upgrade to a better home. Conversely, those indicating that they were downscaling due to financial pressure were proportionately more represented in the higherincome segments. A movement towards greater demand for more affordable properties is also seen in the average time taken to sell a property in the middle-income segment (12.8 weeks) over the course of 2014 being less than the time required in the upper- and high-net-worth segment (19.2 weeks). Overall, these recent trends match a longer arching shift that has gathered momentum since the fall of apartheid, that being the continued emergence of a financially stable black middle class.

Location, Location, Location

Due to urbanisation and densification, commuting times are on the rise, spurring demand for housing in areas offering greater transportation convenience, with the main urban centres of Johannesburg, Cape Town and Durban exhibiting the highest levels of demand.

To date, due to limited mass public transportation in the country’s major cities, ring road access has been the leading factor related to transportation connectivity for which developers could charge a premium. However, transit-oriented development is becoming increasingly popular, as seen in the impact of the Gautrain – a passenger rail network linking a selection of suburbs to Johannesburg and Pretoria’s main commercial districts – on residential and mixeduse projects, with neighbourhoods like downtown Johannesburg and Cape Town’s central business district seeing high levels of interest. Lifestyle wise, similar to what has taken place in North America and Europe, South Africans are increasingly valuing convenience over property size and are willing to sacrifice acreage and gardens for smaller properties closer to amenities. A case in point is the rapid pace of development and strong uptake of executive and luxury condominiums – a concept still relatively new to the country – seen in Johannesburg’s prime shopping and office district of Sandton.

Average prices in Cape Town are considerably higher than in Durban or Johannesburg as there is a scarcity of land for development, with the city being surrounded by mountains, sea and valuable agricultural land. Durban, by contrast, has plentiful vacant land lying between the city core, airport and port. Much of this is owned by the domestic sugar producer Tongaat Hullet, who is in the midst of rezoning and packaging plots for projects.

Foreign Demand

Overall, South Africa offers a fairly liberal regime when it comes to foreign ownership, although the overall contribution of foreign ownership is quite small and mainly restricted to high-net-worth areas such as the Western Cape’s Garden Route, the Durban shorefront, and the wealthier suburbs of Johannesburg. Cape Town and Durban have historically dominated the second home markets, with Cape Town claiming status as the prime destination for foreign holiday buyers. As wealthy Africans replace Europeans as the faster-growing source market for foreign ownership, Johannesburg is catching up, as this new group of buyers is more attracted to leisure, shopping, medical and education options that they are unable to find in their home country, than sea and sun. In FNB’s first quarter of 2014 survey, the share of foreign homebuyers believed to be from elsewhere on the continent was 19.5%, up from 16% the quarter prior.

The rand has been one of the world’s fastest falling currencies in recent years, dropping since the beginning of 2012 from being worth seven to nearly 11 to the dollar. In turn, although in nominal local currency (discounting inflation) property prices are not far off from the historic highs recorded in 2007/08, in foreign currency terms, the FNB dollar-denominated House Price Index for March 2014 shows a price decline of 19.7% since the end of 2010. Foreign buying, expressed as a percentage of total home buying, hovers around 3% compared to 7% at the height of the boom in 2005, indicating that although the weak rand makes the market more attractive, other factors might be impeding on foreign appetite. “We believe that the rand on its own does very little to support foreign buying and, in fact, a weak rand could be interpreted as a deterioration in investor sentiment towards South Africa as a whole,” said FNB’s Loos, adding that falling international sales are not unique to South Africa as “a weak global economy is diminishing the popularity of property as an asset class in most places”.

No Bubble Trouble

Property markets around the globe – including South Africa’s, albeit at a lesser extent – took hits the last time they experienced booms. Accordingly, with the residential market now in the recovery phase and housing prices growing at a rate faster than the general economy, questions arise over the degree to which upward swings in prices are driven by solid market fundamentals such as urbanisation and population growth rather than opportunism. For FNB’s Loos, despite the fact that both the domestic and global picture are still showing signs of economic unease and political risk, it is important to note that housing price movements, when discounting inflation, remain flat. And with no clear upward trend, there is little temptation for speculation, especially when considering that there is not much of a gap between housing inflation and interest rates that are expected to rise further.

“Buying to let”, which accounts for 8-9% of current sales according to FNB, is limited, especially compared to the peak of 25% witnessed in 2004 at the height of the boom. This should be considered a good sign as non-essential buying, a main trait of an over-exuberant market, is being kept in check. “Many buy-to let investors have become disillusioned with the level of rental income generated on their properties and do not want to be over-committed in the event another recession hits,” said Loos. In an environment of high running costs and capital appreciation on par with interest rates, the economics of owning to rent do not add up for the time being.

For ABSA’s Du Toit, perhaps the clearest sign that the property market is in decent shape is the lack of media coverage being received. “The media only tends to make noise when they see signs or hear rumblings of a collapse, or when the sector is experiencing extreme ups or downs,” he told OBG.


South Africa’s commercial market is exhibiting dual tendencies, characterised by highgrade office space in premium locations experiencing record sales and being highly sought, while the B-grade properties are experiencing high vacancy rates. All of this is leading to the gap in rental rates between A and B grade properties widening. The current office vacancy rate stands around 11%, a figure that is much higher in older, secondary nodes.

According to JLL, South Africa alone possesses 15m sq metres of modern office space, compared to just 2m sq metres for the entire rest of sub-Saharan Africa and just 4m sq metres for all of Northern Africa. AECOM, in its “Africa Property and Construction Handbook 2013” includes an “International Prestigious Office Rental Comparison”, in which listings for rentals in dollars per sq metre per annum for Cape Town ($240), Durban ($242) and Johannesburg ($310) come out cheaper than those for other major African cities including Cairo ($373) and Lagos ($840). When considering that South Africa was identified by JLL in a report published in May 2014 as the continent’s only transparent real estate market, ranking 21st globally, it arguably stands out as the continent’s most attractive commercial property destination for corporate occupation.

According to a report published by property management group Broll, commercial property recorded a 15.3% total return in 2013, a slight improvement over the 15.1% earned the year previous. SAPOA figures for the third quarter of 2013 show total office supply increasing to 16.2m sq metres with an additional 796,000 sq metres under construction.

Property consultants Rode & Associates report that growth in nominal rentals for highly sought-after areas such as Sandton (8%), Cape Town’s Century City (10%), and Menlyn in Pretoria (8%) exceeded building cost inflation of 6% for the fourth quarter of 2013. This bodes well for developer returns and is encouraging a continuing stream of developments in prime locations. “South African developers, compared to developers in places like Dubai, are quite conservative and rely on strong market research and needs assessment,” SAPOA’s Gopal counters.

The economy, growing at just around 2%, is not experiencing significant business expansion and with new office stock outpacing overall growth, there is the risk that some of the older, incumbent commercial districts could experience a mass exodus. “You only see real growth in the office market when GDP growth surpasses 3%,” Marc Wainer, executive chairman of Redefine Properties, told OBG. “Companies are moving from A into new P (premium) grade properties, allowing B-grade tenants to upgrade into Agrade premises at no real additional costs. In a period of low GDP growth, the focus for many developers becomes one of retaining tenants.”

Mixed & Mega

A wave of greenfield mixed-use developments are hitting the market. When complete, Waterfall City, a 1.6m-sq-metre development undertaken by property group Atterbury that is located midway between Johannesburg and Pretoria will include, alongside a business estate, a shopping mall, a private hospital, and 1200 residential units. So far, new tenants who have opted to take up office space in the development include telecom group Cell C (a 44,200-sq-metre campus) and construction giant Group Five (23,000 sq metres), in addition to Honda, Cummins and Novartis.

Century City is a 250-ha mixed-use development located in the suburb of Milnerton, a 15-minute drive from Cape Town’s central business district. The precinct is anchored by the Canal Walk (141,000 sq metres) shopping centre, and amenities in addition to office and housing stock, a theme park, five hotels, schools, sports clubs and conference facilities. The project is in the midst of an R4.3bn ($407.21m) expansion that is expected to raise the development’s overall value to R21bn ($1.99bn).

In April 2014, it was announced that Chinese developer Shanghai Zendai had acquired 1600 ha of land in Modderfontein, east of Johannesburg, towards which it will be investing R84bn ($7.95bn) over 15 years for conversion into residential, industrial and commercial space. While the deal has provoked controversy over fears associated with Chinese investment into Africa, it also feeds into a more general discussion around whether or not the market can sustain a plethora of projects of this magnitude.

Greater Choice

The construction of new office park nodes also gives companies, many of which hastily abandoned Johannesburg’s central business district in the 1990s into whatever separately leased premises they could find, the opportunity to construct their own centralised headquarters and relocate their entire workforce under one roof.

“Single-tenant spaces are faring far better than multi-tenanted plots. Many large corporates, including the likes of Sasol, Discovery and EY, are moving into their own fit-for-purpose newly built locations,” SAPOA’s Gopal told OBG.

For Motaung, the head of research for JLL South Africa, new supply hitting the market works favourably for South African corporates who until now have paid excessive rates to be in desired locations that were undersupplied. “Taking the example of Johannesburg, we are seeing new commercial developments offering good quality buildings in places like Waterfall City and Modderfontein. These locations could soon become part of the Gautrain network and offer an alternative to Sandton which is expensive, capped on how many floors an office tower is permitted, and becoming overly congested in terms of traffic.” Sandton is set to remain the hub for professional services companies, like financial and legal firms, who for purposes of image need to be located within premium nodes. On the other hand, the newer developments will likely make more sense for companies with a large middle-income workforce and/or call centre staff, especially as there is far greater stock of affordable homes and rental units nearby for employees to reside in.


Despite challenges related to manufacturing output, South Africa’s industrial sector fared well in 2013, posting a total return of 17.1%, according to Broll. This is in part due to South Africa’s status as a net importer, which creates a steady need for warehousing and distribution space.

Just as with trends in the office segment, there is a marked difference in the level of demand and the prices charged between newer and more modern industrial parks that offer larger warehousing space, better freeway access, heightened security, clustering opportunities and green space, and older, B-grade facilities that are struggling to find tenants.

Hospitality & Retail

The hospitality segment is still in a recovery and correction phase following what most consider was an overbuild of capacity in the prelude to the 2010 World Cup and a recessionary period that followed soon after. The figures for 2013 and projections for 2014 show tourism numbers, as well as room revenues, to be on the rise (see Tourism chapter). Statistics South Africa, as of November 2013, reports that total income, in current prices, for the tourism accommodation sector increased a healthy 10.5% year-on-year.

South Africa’s retail landscape is easily the continent’s most sophisticated and advanced, with nearly 21m sq metres of formal retail space already in place and a further 2m sq metres under construction. The sector is complex and highly fragmented, with some of the more affluent suburbs over-retailed and new developments catering towards the country’s lower income brackets, especially around public transportation nodes, showing greater promise. Consumers across all demographics are feeling the pinch due to rising expenditures, greater indebtedness and a weak rand, all of which is leading retail developers to be more cautious and tempered in their approach (see Industry & Retail chapter).

Municipal Effect

Costs for renters and owners in the commercial and industrial segments are increasing at a pace faster than for the residential market. According to the Investment Property Databank (IPD), operating costs in the office sector increased by 13% in 2012 and 12.3% in the first half of 2013 compared to consumer inflation of 5.1% for the same period. “Electricity and municipal costs account for around 60% of operating costs. These have to be passed on to tenants,” said Gopal.

Gopal believes that how municipalities treat and value properties plays a determining factor in where developers build and companies locate. “For many local governments, especially in areas where there are no mines or extractive industries, commercial and industrial property is the largest tax payer and in turn the municipalities try to squeeze as much revenue as they can.” Gopal references Cape Town and the Ekurhuleni Metropolitan in Gauteng as examples where local authorities proactively incentivise and offer discounts for businesses to locate with the realisation that the multiplier effect on the wider economy surpasses any lost tax and utility earnings.

Going Green

Electricity prices in South Africa have risen by more than 170% over the past five years, a trajectory that is set to continue as the national power utility Eskom has been granted annual tariff increases of 8% over the next five years, increasing interest in energy efficient developments in order to better control costs.

The Green Business Council of South Africa ( GBCSA) was established in 2007 as a not-for-profit organisation serving to independently grade and certify new buildings according to standards for environmental sustainability. To date, the entity has certified 55 buildings, 20 of which are public, and asserts that collectively these projects could yield annual savings of 76m KWh, equivalent to the amount of electricity needed by 5300 households and the carbon emissions produced by 28,000 cars. Jarrod Lewin, GBCSA’s business development manager, explained to OBG that because the new building market constitutes only 2% of all offices in the country, they have recently extended their qualification scheme to also cover refurbishments and will soon be accrediting retail outlets and homes as well.


South Africa’s property market appears to be in a healthy place, demonstrating solid if not necessarily exceptional growth. However, there are exogenous pressures that could hamper demand, including a sluggish economy, eroding business and consumer confidence, escalating running rates, in addition to interest rate hikes, but these could serve as factors that will keep growth in check and temper the market from becoming overexuberant.

While the combination of slower growth and higher inflation will erode domestic spending power and reduce capital availability for investment in the real estate market, the 2014 budget may ease some of those challenges. Increased spending on social infrastructure, such as for education, health and community organisation initiatives, along with higher outlays on transport links and utilities, can also have an impact on the real estate market. Improved services provide added value to properties, especially in outlying areas of major cities, with faster transport access coupled with city-standard infrastructure helping to boost both property appeal and prices.