By Simon Mallinson on June 27th, 2017
Despite South Africa’s slip into a recession, an expected downgrade of key local bank ratings and a negative economic outlook, the real estate market is performing well. For the first few months of 2017 the domestic transaction market was punching above 2016 levels (a recent high watermark) and as we approach the halfway point of the year, 2017 is still shaping up to be on par with last year’s levels.
South Africa remains a domestically-powered real estate market, with just 5% of activity recorded by groups with headquarters outside of the country. One of the largest recent foreign investments was the sale of Investec’s Hyatt Regency in Johannesburg to Middle Eastern Bin Otaiba Investment for ZAR505.5m ($36m).
But, perhaps a sign of growing concern within the country, overseas investment activity by South African firms has been climbing since 2015. The average quarterly cross-border investment volume for the period 2007-14 was $72m and since the start of 2015 average quarterly activity has registered at $391m. This represents a share of more than 40% of South African capital placed in direct commercial real estate investments.
Retail assets have been a clear favorite for South African investors over this period, with $2.1b of acquisitions in the sector, while office is second at $1.5b. These two sectors together account for 83% of activity. Given the economic difficulties at home, income appears to be a driver of investment decisions, with the average retail cap rate being delivered by South African overseas investments at 7.4% and 7.0% for the offices. This compares with 6.4% and 6.3% cap rates from domestic South African retail and office sectors, respectively.
As we have seen in other countries, concern that domestic economic conditions will lead to weaker real estate markets, coupled with a need for diversification, will likely lead to more South African investors stepping into the global investment market in the coming years.