GDP growth and power supply stability needed to reduce office vacancies

25th January 2022

GDP growth and power supply stability needed to reduce office vacancies

By John Jack, CEO of Galetti Corporate Real Estate

While the South African commercial real estate sector fights to recoup its losses, industry insiders worry that the impact of uncontrollable macroeconomic factors such as a stunted growth outlook, high debt to GDP ratios and anticipated electricity hikes, may add further pressure going into 2022.

“South Africa’s Gross Domestic Product (GDP) took a hit with the impact of COVID-19 in 2020, reaching lows of -6.4% according to FNB data,” explains John Jack, CEO of Galetti Corporate Real Estate. “While analysts predict that 2022’s GDP will grow to +4.7%, this recovery may not be enough to help grow our sector in the short-term.”

The country’s GDP is a strong indicator of the state of the economy at large, reflecting South Africa’s output capability and levels of business activity. Low levels of business activity are linked to the decline in demand for office space, as companies continue to downsize and reduce operational costs. “While industrial property remains the strongest performer in our sector, we do anticipate that any drastic external factors could further suppress investor appetites,” adds Jack. “It's hard to believe that Prime Industrial Net rentals are at the same level as some of the office sectors net rental levels.” 

Rising imbalances between the South African government’s debt to GDP ratios are also set to impact landlords as the Treasury looks to close the gap by hiking short-term interest rates. “Interest rate hikes will place pressure on landlords given that most debt is pinned to a variable interest rate structure. 

Power supply could add fuel to the fire

Eskom has indicated that they intend to implement a 20.5% price hike for electricity supply for their 2023 Financial Year, which will come into effect from 1 April 2022 if passed.

“Local businesses have already had to battle with the operational challenges presented by Eskom’s irregular power supply in the frequent loadshedding of the past few years,” says Jack. “Those who have not invested in alternative power to remain operational when the power supply is interrupted may see this massive price hike as the final straw for continuing operations in South Africa.”

The increases have been proposed by Eskom in a bid to give the State-Owned Enterprise the funds necessary to repair faults on the grid and reduce the need for loadshedding. However, given the company’s troubled history, some fear that the impact of these rate hikes may do more harm than good.

“While the businesses in South Africa have a reputation for being resilient in spite of volatile macroeconomic factors, the economy needs stability in order to fully recover from the impact of COVID-19,” says Jack. 

The upside

Despite the circumstances, Jack believes that the sector is still on its way to recovery. “There is a general sense that a return to the office is imminent as restrictions are relaxed and employers seek to reposition the office as a space for collaboration and an opportunity to ‘return to normal.’ Many major employers such as Discovery are implementing mandatory vaccination policies in the workplace, which will also lead to more in-office working.”

The data from the latest TPN Credit Bureau is a further indicator of the office’s relative stability, showing that the sector leads industrial and retail property for rent repayments. The data shows that 71% of office tenants were in good standing (paying rent in full and on time) for rental payments for the third quarter of 2021, followed by industrial at 70% and retail at 64%. “While the sector is still facing an oversupply of office space available, landlords can expect some relief in the fact that once a tenant is secured, they have been through the worst and are likely to be a resilient business.,” comments Jack.

And while the proposed tariff increases from Eskom will place pressure on landlords and tenants reliant on the grid for power supply, those who chose to make the move to alternative power sources stand to benefit. “Buildings with a ‘green approach’, favouring renewable energy, will fare better as tenants look to save costs and have as little disruption to operations as possible given the massive upheaval of the past few years.”

“Landlords that are agile and seek to add more value to their tenants by making the adaptations needed in these uncertain times stand the strongest chance of recovery,” he concludes.