As announced by the South African Reserve Bank on 23 July, the repo rate now sits at an unprecedented low of 3.5% with the prime lending rate at 7%. This is the fourth cut for this year and as it stands, the repo rate has now been reduced by 300 basis points in 2020 alone. With or without lockdown, this is where we believe the repo rate needs to be to encourage any sort of investment.
With no option to reduce tax, interest rate reductions are one of the few mechanisms that government could make use of to stimulate spending. This latest announcement is welcomed in a tough economic climate. In addition to positively impacting on the price of property for cash buyers (in particular), prime-linked loans will also receive some reprieve.
The historically low interest rate levels, coupled with the highest property yields that the market has experienced in 20 years, brings great opportunity for investment and will definitely see transaction volumes increasing. We are working with a number of significant players who are looking at opportunities that are presenting themselves in the market. While we believe it will take three to five years for corporate real estate to return to levels experienced early last year, there is some hope for the present.
It is all about risk versus reward. Many offices are standing vacant or at around 50% capacity; so right now, it’s about finding reputable tenants to help weather the storm with you.
We speculate that the market is entering a phase of low growth. This is why yields have pushed out - to compensate investors for the lost capital growth, leading to similar total returns. This phenomenon is coupled with a total re-rating of rentals across the board and reversions reaching levels as low as 30-40%. Based on this, there is some serious opportunity to acquire properties at great value. We are seeing prime real estate in Sandton for instance at unprecedented lows.
Interest rates and yields tend to move in tandem over the long term. This means we will either see increasing interest rates or falling yields in that period; more than likely, we will see falling yields due to the low growth environment requiring the interest rate to remain low.
With all things considered, we are lining the market up for a slow but much-needed recovery over the next three to five years.
