Although far from the conditions of the early 2000s, South Africa’s property market has remained resilient, despite challenging macroeconomic conditions. Rising demand for affordable housing and a host of “new city” projects unveiled in the past year have kept the residential market steady, while A-grade commercial space – albeit on the verge of oversupply in some areas – is poised for strong growth.

Although all segments of the real estate market have struggled with rising electricity prices, the country’s burgeoning e-commerce, transport and logistics segments are also expected to improve vacancy and rental rates across all property segments.

Growth Potential

Rising interest in real estate investment trusts (REITs), a robust retail segment, steady population growth and plans for billions in new infrastructure outlay have led to a positive mid- to long-term forecast, although the sector will need to face near-term challenges, as slow headline growth, rising inflation, labour unrest, and an expected interest rate hike continue to affect consumer confidence and spending. A smaller economic contributor than mining and agriculture, real estate is nonetheless an important tertiary sector for the South African economy. PwC estimates the sector’s total value was $5.11bn in 2014, and projects this figure to rise to $6.66bn in 2015, $8.07bn in 2016 and $9.31bn in 2017. Meanwhile, real estate’s percentage contribution to GDP was an estimated 1.61% in 2014, and is forecast to rise to 1.64% by 2017.


In Q4 2014, residential stock stood at 6.07m properties worth a total of R4.27trn ($368.93bn), according to Absa Bank’s “Q2 2015 Housing Review”, of which 2.11m properties worth R2.25trn ($194.4bn) were bonded and 3.96m houses worth R2.02trn ($174.53bn) were non-bonded.

Absa Bank reports that the average nominal price of a middle segment home, offering between 80 and 400 sq metres of space, and priced at less than R4.2m ($362,880), stood at roughly R1.32m ($112,320) during Q1 2015, up 7.3% year-on-year, while real price inflation in middle-segment housing stood at 3% in the same period, compared to a headline rate of 4.2%. Although the bank notes that its sample size for luxury properties is smaller than other segments, home prices in this category rose by a nominal 10.6% year-on-year (y-o-y) during Q1 2015 to average R5.77m ($498,528). Residential building activity was subdued in late 2014, however, and contracted further in early 2015, with approved building plans falling by 6.1% y-o-y to 8444 units in January and February 2015. The residential segment faces a number of serious challenges, most notably rising inflation, falling consumer confidence, labour unrest, electricity shortages and a period of currency depreciation which saw the rand lose 7% of its value against the US dollar between January and July 2015.

In its June 2015 economic forecast for the country, the IMF reported that with projected GDP growth of 2% in 2015 and 2016, South Africa’s near-term outlook is gloomy, while the central bank raised its benchmark rate for the first time in a year in July 2015, bumping it by 25 basis points to 6%, to combat inflation. “What has changed the most over the past year is that macroeconomic fundamentals have weakened. Employment levels remain relatively low, which have an impact on consumer finances, and we had some severe strikes, which hurt consumption expenditure and household income,” Jacques du Toit, senior property analyst at Absa Bank, told OBG. Consumer confidence is also declining.

The Bureau for Economic Research reported that consumer confidence remained subdued throughout 2014, measuring 0 index points during Q4 2014, and -0.8 for the full year, while Du Toit reports that it fell to its lowest level in over 14 years during Q2 2015.


Property lending has been subdued as a result. South Africa’s variable mortgage interest rate stood at 9.25% annually as of July 2015, after a 75-basis-point rate hike in July 2014. The household debt service-cost ratio has increased from 8.6% at the end of 2013 to 9.3% as of Q4 2014, while the debt-to-income ratio for the same period stood at 77.6%, compared to just over 74% in Q4 2013.

Absa Bank reports that the average interest rate charged to service household debt was 11.98% in Q4 2014, as a result of both rising debt burdens and credit impairment, while growth in the value of outstanding household mortgages rested just below 3% as the first quarter of 2015 came to a close.

“An estimated 45% of credit-active consumers have impaired credit records, which is equivalent to more than 10m credit-active consumers, compared to just over 36% in 2007. As a bank it’s difficult to do business with 10m-plus borrowers who have a bad credit history. You can extend credit, but it will be at a price that they can’t afford,” Du Toit told OBG The residential rental market, meanwhile, deteriorated slightly in the second half of 2014, with the Tenant Profile Network Credit Bureau’s Rental Payment Monitor reporting that rent paid on time dropped by two percentage points to 71% between Q3 and Q4. The country’s average monthly residential rental tariff stood at R5620 ($485.57) during Q4 2013, while rental inflation reached 4.7% for houses, 5% for townhouses and 6.1% for flats during Q1 2015.

Future Growth Drivers

Population growth will help keep the residential sector resilient. According to the UN’s “World Population Prospects Report”, South Africa’s population will rise to 72.9m by 2050, while 62% of its 53m residents live in urban areas, with urbanisation growing by 1.21% annually.

With urbanisation and population growth accelerating, affordable housing and new city developments stand as the most high-potential growth drivers within the residential segment. According to Absa Bank, the price of affordable housing – meaning homes of 40-79 sq metres, and priced up to R575,000 ($49,680) – grew by 8.3% during Q1 2015 to hit R390,000 ($33,696), equivalent to real price inflation of 4%, compared to 1.9% during Q4 2014.

A 2012 study published by International Housing Solutions found that South Africa’s affordable housing backlog stood at 2.1m, while PwC reports the backlog was 2.3m units in 2014. While the volume of new housing units reported as constructed dropped 1.6% y-o-y in January 2015, this was largely the result of a slowdown in new builds for houses of more or less than 80 sq metres, with flats and townhouses rising by almost 30% during the same period.

“In the last 20 years, more than 70% of new housing was in the segment of small houses and townhouses; that is a structural feature of the South African housing market, especially in urban areas. That demand will continue, and there will be a lot of scope in the future to invest in the segment,” Du Toit told OBG.

New Cities

New master-planned projects are maintaining their popularity among middle- and upper-income segments, providing self-sustaining, greenfield, mixed-use developments with heightened security and amenities. These developments have been a prominent feature of South Africa’s real estate market for years, and more projects are in the pipeline. In December 2014 the government announced plans to build three such cities, potentially in West Rand and Sedibeng. Although further details are yet to be unveiled, Gauteng easily outpaces other provinces in new city builds.

Further to this, as well as developments like the 800,000-sq-metre Waterfall Business Estate, Gauteng is also slated to host the enormous Modderfontein New City (MNC), under development by Chinese firm Shanghai Zendai since 2013, as well as the landmark luxury development, Steyn City. Branded as both a smart city and the “New York of Africa”, the $8bn MNC will span a 1600-ha plot acquired from explosives company AECI for R1bn ($86.4m), and sit near the upscale suburb of Sandton.

On completion, the city is set to house up to 100,000 residents. Perhaps the most highly publicised new city to launch in Gauteng is Steyn City, which recently opened its first phase after the project launched in May 2013. Representing the largest development of its kind in Africa, Steyn City is located north of Johannesburg, and covers an area four times the size of Monaco, including over 400 ha of recreational space.

In March 2015 developers inaugurated the city’s first phase, which includes 93 apartments, six show homes and 220 freehold stands – houses offering between 800 and 4000 sq metres of space – as well as 19 350-sq-metre “clusters” and additional 45 off-plan clusters. One-, two- and three-bedroom apartments vary in size and price, from 74 sq metres to 149 sq metres, and between R1.65m ($142,560) and R3.9m ($336,960) per unit, while 350-sq-metre luxury apartments are priced at R13.9m ($1.2m). Meanwhile, cluster units cost between R6.2m ($535,680) and R8.4m ($725,760), freehold stands cost between R2.3m ($198,720) and R16m ($1.38m), and fully equipped show homes cost R17m ($1.47m).

City Challenges

The projects are not without challenges, including the sizeable financing required to deliver new builds. Steyn City Properties, for example, announced in March that R6.5bn ($561.6m) had been invested in the project so far, with plans for an additional R50bn ($4.32bn) during its next development phase, which will bring the total number of residents to 25,000. Land development to prepare the Steyn City site alone cost R6bn ($518.4m). In the case of Modderfontein New City, Shanghai Zendai is already at risk of overexposure in China, which began to show signs of an economic slowdown during mid-year, and in July 2014 ratings agency Moody’s withdrew its “B3” corporate family rating for the company, a month after investment analysts warned of its susceptibility to refinancing risks.

Although local banks have been increasingly involved in property lending, the size and scope of new cities entails much higher levels of financing: according to a 2013 report in Johannesburg’s Moneyweb News, AIH’s finance agreement with Nedbank Corporate Property Group for the Waterfall Business Estate project was the largest such deal ever concluded by the bank. With billions in fresh investment and sustained construction efforts required to deliver new projects, some stakeholders have questioned developers’ ability to maintain momentum and fully deliver all planned features and amenities.

“These big projects will probably straddle property cycles; to catch them at the right point is complex in itself. You’ve got to do the right thing at the right time in the correct sequence. They tend to be tangled in fairly complex financial structures and sometimes it’s not the project that fails but the bank or the financial entity,” François Viruly, director of property research firm Viruly Consulting, told OBG.

Infrastructure Drive

These new cities, like the country’s wider real estate sector, will require significant investment in infrastructure before moving forward. According to a March 2015 report published by PwC, one of the most significant risks to economic growth is the country’s ongoing energy challenges, which began in 2008 and became increasingly problematic over the subsequent 18 months.

“Obviously electricity has an impact on property development, because you cannot get approval to develop property without municipal service approval. Sometimes they have no problem with your plans or location, but often it comes down to ‘Sorry, we don’t have enough electricity,’” Du Toit told OBG.

The situation is set to improve: Eskom, the country’s state-owned utilities provider, is currently undergoing a $33bn capacity expansion programme, targeting an additional 17 GW of new generating capacity by 2019, while the country’s National Development Plan, running until 2030, prioritises infrastructure development, including new utilities and infrastructure builds (see Construction chapter).

New city developers, meanwhile, have moved to build their own infrastructure, despite this adding significant costs to the projects’ total price tags. At Steyn City, for example, two bulk gas storage farms have been installed, and the plan is to power the city under an energy-efficient model that will see long-lasting LED street lights installed and widespread use of rooftop solar power generation.


Although the commercial market is expected to regain its footing in the medium term, it has been impacted by oversupply and relatively high vacancy levels. PwC reports that the office sector’s vacancy rates during Q4 2014 stood at 11.1%, while a spate of new developments are increasing pressure on rental and vacancy rates for lower-grade office space, with average rental rates standing between $14 and $17 per sq metre in Johannesburg, and between $10 and $14 per sq metre in Cape Town.

South Africa’s energy challenges have proven to be an issue for the commercial market. “The increasing cost of occupation due to factors like electricity and taxes will impact the office market, with developers focusing more on tenant retention,” Louis van der Watt, CEO of Atterbury, told OBG.

However, the sector has witnessed marginal improvement over the course of 2015. For example, in its “Q1 2015 Gauteng Office Market Analysis”, Colliers International reported that the province’s main office hubs of Sandton, Rosebank, Melrose, Illovo, Waterfall Business Estate, Woodmead and Centurion are expected to experience increased levels of activity in the coming years, although the firm noted that there is currently a large amount of space in the market, particularly A- and P-Grade stock.

Colliers reports that Sandton in particular remains an area of significant concern, while Pretoria/ Tshwane is also struggling with challenges related to oversupply, and project delays caused by rising building costs and falling rental yields, which dropped by 10-15% y-o-y during Q1 2015 to rest at between R185 ($15.98) and R190 ($16.42) per sq metre, down from R190-R195 ($16.42-16.85) during Q4 2014.

The office market in the Western Cape during Q1 2015, meanwhile, was characterised by Colliers as tenant-driven, with very positive levels of demand. Although the province’s office market is also struggling with over-supply of A- and P-Grade stock, Cape Town’s vacancy rates remained the lowest nationally for the third consecutive quarter, at 9.5%, while rental rates stood at R215 ($18.58) per sq metre.

Retail Property

Retail property holds the highest near-term growth potential, with the South African Property Owner’s Association reporting that the retail sector was able to outperform all others in 2014. Moreover, PwC reports that, due to a growing middle class and rising disposable incomes, the retail segment is leading the property market.

Notable developments include Waterfall City’s Mall of Africa, the country’s largest single-phase mall, which is set to open in April 2016, as well as Sandton City’s $20m Diamond Walk expansion. Outside of some of the major developments with high-end space, however, the outlook is less optimistic.

“What we see is that within the regional and super-regional retail malls, the demand is still high. At the same time, there is a dipping of rental rates and increased vacancy in secondary and outlying retail sectors. Because of falling disposable income, spending is not as high as it could be, so there is not enough demand. The sector is in a bit of a conundrum here, but it’s doing okay,” Craig Hean, the managing director of JLL South Africa, told OBG.

At the same time, the anticipated expansion of the e-commerce segment could profoundly alter the retail real estate market over the longer term. PwC note that, although demand for prime retail space remains high, the country’s increasingly digitally literate population and government moves to achieve 100% broadband penetration by 2030 are expected to lead to exponential growth in e-commerce. Although this could mean a contraction in the formal retail segment, it offers considerable benefits to the industrial segment, which has been struggling in recent years due to falling domestic production and rising power costs, among other factors. Moreover, even while commercial and retail properties offer significant investment opportunities, real estate investment trusts (REITs) are also rising to become a popular investment vehicle (see analysis).


Electricity and infrastructure deficits, as well as the country’s subdued macroeconomic conditions, will challenge property stakeholders in the coming years. Even so, the sector benefits from population growth, the rising attractiveness of REITs and a robust retail environment dovetailing its increasingly popular mixed-use schemes. The property cycle looks to be approaching the end of its lowest point, and real estate seems poised for a resurgence in the coming years. Despite various near-term challenges, therefore, the mid-term outlook remains positive.