Why the biggest rate hike in nearly 20 years could drive investors to Cape Town

The recent highest single rise in the repo rate in almost 20 years is likely to drive investor movement to Cape Town, which is currently seeing the strongest rental growth of the major industrial agglomerations and is widely regarded as a well-run city and for the largely free of national tenders.

This is according to Brent Townes, Commercial Property COO for Lew Geffen Sotheby’s International Realty in Cape Town, who said: “Nominal rents for prime industrial space of 500m² grew by 7.2% year-on-year in Cape Town in the second quarter of 2022, continuing above pre-Covid levels as demand for space exceeds supply.

“This was the strongest rental growth seen in the country, with the Mother City’s vacancy factor continuing to fall, reaching 2.8 on Rode’s vacancy scale, implying a vacancy rate of under 5% compared to areas such as Wits which saw a 5.8% increase.

“A-grade offices in Cape Town also increased in nominal terms over the same period, with Tygervalley and Century City increasing by 2% and 3.2% respectively, while Gauteng counterpart Sandton decreased by 1%.”

Townes said capitalization rates in Cape Town are declining due to rising demand driving up prices. “The City traditionally trades from 0.75% to 1% below the national cap rates, but in Cape Town we have specific dynamics at play at the moment.

“Firstly, there is a shortage of specific types of property for sale, especially shopping centers and large distribution centers, which keeps prices higher than Gauteng. And because of the scarcity of land, investors are therefore reluctant to unload because they the question is how they can replace the assets they sell, when they have largely de-risked their investment.”

Townes said there are also a number of challenges the city needs to address, including policing to address social unrest and contact crimes and improved rail commuting for better worker movement.

“Exporters are also affected by port container congestion and cold room access and securing a DC/logistics chain is problematic as designated vacant land parcels of sufficient size are simply not available that will drive radial expansion along the N7.

“Energy supply remains an issue, particularly for process-driven manufacturing tenants, but that is a national rather than a regional issue and the city is better off with fewer outages and is already working on future alternatives.”

Comparing sales Q1 and Q2 in Cape Town, the number of freehold and sectional title registrations decreased in the second quarter, however there were a number of significant increases.

The total value of property sold increased by 5% and the average sale price by 66% and with sectional title units the average sale price increased by a nominal R4.02%.

“Also of note is that eight of the 61 areas account for 75% of the value of these transactions, namely Airport Industria, Brackenfell, the CBD, Milnerton, Montagu Gardens, Ottery, East, Parow and Salt River. They are also accounting for 80% of all section title registrations.

Regarding the impact of the rising rates on landlords, Townes says that this argument only holds water if the property is agreed by the owner – and then usually at a maximum of 70% Loan to Value Ratio (LTV) which is the battle for the owners soften.

“Many owners have held their property for long periods and also learned not to exceed (lessons learned from the accident). Tenants are then not significantly affected because they are not liable for additional payments beyond their rental covenants.

“However, it must be remembered that investments in property can only be secured through good tenants who pay regularly and on time and who conduct business in an ethical and fair manner.

“Landlords need to look beyond the lease covenants to their potential for business growth and whether the space they provide can accommodate their growth projections – in other words, growth alongside tenant.

To read: Cape Town to buy power from commercial producers

Why the biggest rate hike in nearly 20 years could drive investors to Cape Town

Source link Why the biggest rate hike in nearly 20 years could drive investors to Cape Town

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