Local property market to feel economic pressure from Ukraine war, warns FNB

7th March 2022 By: Marleny Arnoldi - Creamer Media Online Writer

While it is still too early to determine what the impact of the Ukrainian/Russian conflict will be on South Africa’s property market, there are seemingly obvious potential impact points, says FNB Commercial Property Finance strategist John Loos.

For example, he says, it seems the conflict is adding to already troublesome global inflationary pressure, particularly with energy prices.

Potential energy supply disruptions in the region, in part as a result of the conflict but also owing to potential sanctions and boycotts against Russia, a key oil and gas producer, have sent energy prices rising significantly.

On March 4, the Brent Crude spot price was near $115/bl, 17% higher than on February 23, the day before the invasion began. This adds to already-mounting energy price inflation pressures, the recent Brent Crude price levels being about 124% above the end of 2020 level, as evidenced with South African petrol prices skyrocketing.

The Ukraine invasion looks likely to add to this fuel price inflation, Loos points out.

In addition, the escalation of sanctions and boycotts against Russia and some allies, and potential retaliation, can further exacerbate broader supply chain disruptions globally, which can have inflationary impacts.

Agricultural Business Chamber chief economist Wandile Sihlobo also foresees potential food price inflation, with Ukraine being a key agricultural producer. He points to maize, wheat, soybean and sunflower oil prices being significantly up from a year ago.

Loos explains that while the inflation in certain commodity prices in agriculture and mining, notably gold as a safe haven investment, can be somewhat beneficial for certain domestic agriculture producers and mining companies, a Ukraine inflationary effect on local food and petrol prices, as well as a possibly more widespread inflation impact from general global inflationary pressures, is likely a negative consequence, which not only eats into consumer incomes to  a greater degree, but also because of greater upside risk to interest rates, given the South African Reserve Bank’s inflation target.


“Upside inflation, and therefore upside interest rate risk, and downside economic growth risk, are the basic macroeconomic risks that appear to emanate from the Ukraine war, the magnitude of which is highly unpredictable.

“What then are the potential impact points for the domestic commercial property sector should such an economic impact play out?”

Given the partial link between short-term interest rates and long bond yields on the one hand, and property capitalisation rates on the other, some negativity around inflation prospects as a result of the Ukraine conflict led to some sell-off of South African government bonds, with the average yield for ten-year bonds having risen from 9.26% on February 25 to 9.665% on March 4.

Loos notes that while this is not a major sell-off in bonds to date, it does suggest that the Ukraine crisis is fueling heightened inflation and interest rate fears, which would likely exert upward pressure on local property capitalisation rates and, hence, be a negative for property valuations.

Moreover, after recent years of rising average vacancy rates in all three major commercial property markets (industrial, retail and office), FNB’s Property Broker Survey late in 2021 was pointing towards a possible stabilisation in retail and office vacancy rates and a decline in industrial property vacancy rates, supported by some recovery in the economy following the sharp 2020 gross domestic product contraction.

“South Africa’s economic situation is fragile at best, however, so any major global recessionary impact on the domestic economy could quite easily see vacancy rates rising once more.

“While industrial property may weather an economic storm of moderate proportions, the fragile retail and office sectors, which are challenged by increasing online retail and greater remote working respectively as it stands, could quite easily see renewed weakness that could return them to rising vacancy rates and further downward pressure on rentals,” Loos laments.

All three sectors could see economic pressures greater than would otherwise be the case, as a result of the Ukraine crisis’ potential global economic impact.

Industrial property’s link to the global economy is quite strong through warehousing and logistics space used for imports and exports, as well as the local manufacturing sector’s strong trade links to the rest of the world.

The retail sector’s links to the global economy are more indirect, rand weakness and higher global inflation partially bringing imported inflation into consumer goods prices, notably in the area of food prices given their global pricing link, and especially petrol prices.

Apart from higher inflation eating into consumer incomes that are already under pressure from a weak economy, rising interest rates lift the cost of servicing debt, further eroding incomes. The war could potentially add to these pressures that have already been mounting.

The office market is arguably the least directly exposed to the potential global economic impact from the Ukraine war, although it does house certain tenants who trade with the world.

“But its potential impact is more indirect, through the slowing economy impacting on the number of office worker jobs, in turn exerting pressure on office space demand.

“Higher interest rates, too, would exert additional pressure on both the landlord and tenant population,” Loos explains.


The Ukraine conflict also looks to be a source of negative pressure on property valuations. However, it is too early and uncertain to tell if the magnitude of the potential economic and interest rate impact will be sufficient to delay an expected return in the All Property Average Capital Value to positive nominal growth this year.

The negative impact of the Ukraine war will be pushing against the lagged positive impact of a normalisation in economic activity, and some economic recovery, following the deep 2020 lockdown recession.

The potential impact of the war on the domestic residential rental market is tough to call, depending on how big the magnitude is. Mild additional upward pressure on interest rates, over and above what would have been the case in the absence of war, could see additional impetus provided to the expected rental market recovery.

“We have expected that the rental market will strengthen as interest rates rise, with the economy and tenant payment performance both recovering after the hard lockdowns, and a greater group of would-be home buyers postponing their home buying to remain in the rental market for longer while rates rise.

“But for this to continue, the negative economic impact of rising interest rates, and any additional Ukraine impact, must be mild at worst. Too big an inflationary and interest rate impact exerts financial pressure on tenants, and then all bets of recovery in this market are off. Therefore, it’s a fine balance,” Loos states.