Election results set to boost commercial property prices, lower yields

John Jack, CEO, Galetti Corporate Real Estate

Lower yields and improved investor confidence

We can expect prices across the commercial property sector to rise while yields improve over the next 18-month period. This will be driven by an increase in investor sentiment as well as occupier confidence, causing more movement in the sector.

During the lead-up to the elections, investors were cautious of an upset and, given the geared nature of the asset, possible significant capital loss. With increased political clarity and the elections now out of the way, we can expect investors to once again transact which will be a much-needed shot in the arm for the commercial property sector.

Improved business confidence

Should Cyril Ramaphosa remain at the helm of the ANC, I believe that we can expect an improved business confidence index, based on his “pro-business, pro-capital” narrative. This will lead to occupiers taking steps to actively invest in or expand their operations, which directly impacts demand for space and therefore the entire commercial property sector. There is usually a lag period which would see us waiting for at least six to 12 months to see any impact in take up. We did however see an immediate uptick in enquiries for space as soon as the elections started to show results, which were largely in line with expectations.

The ANC’s win could give Ramaphosa the mandate to roll out his plan to boost the industrial sector with incentives, however government is typically slow to move, so one would imagine the market would only see this type of transition happen in the next 18-24 months. When the roll out does happen, we can expect it to have a significant impact to the sector as well as job creation.

Market movement

Some of the key commercial property investment strategies leading up to the election included a largely wait and see approach. Those properties that did trade, did so at a discount. I anticipate that the impact of the election will only be felt by the commercial property sector towards the end of the year, given the length of time it takes for the next commercial lease event to present itself. Investors that grabbed opportunities during the lead up to the elections will be well poised now as the market begin to gain momentum again.

Listed property sector

The listed property sector has just come out of one of the worst 12 months in its history, with significant revisions already seen. A recovery in the market in general would see good returns and if business confidence does indeed improve, we can expect the REIT sector to recover over the next few quarters.

Questions remain around Eskom

With the Eskom situation remaining fragile, what is needed right now is capital spend to bring the infrastructure up to spec. In order for the government to make meaningful improvement to Eskom, the country’s GDP must grow. For this to happen we need clear policy, a stable political landscape and increased business confidence.

Ratings agencies

I believe the ANC’s relatively strong victory (although reduced) will give confidence to the ratings agencies and am hopeful that South Africa can fight off another downgrade. A stable rating gives investors breathing space and allows them to sweat their assets and attract tenants on the basis that South Africa maintains its stability and growth on the back of government’s plans.

Looking forward, commercial property across the board should benefit from a positive election outcome. Those investors that took advantage of the soft yields that were being offered in the market in the run up to the election stand to gain, with the industrial sector being one of the quickest to react.