By John Loos, Property Sector Strategist at FNB Commercial Property Finance
This latest 50 basis point interest rate hike on its own has a limited dampening impact on the commercial property market. But it brings the cumulative interest rate hiking in the current cycle to 475 basis points since late-2021, and that amount of interest rate hiking, and this is very significant in magnitude, much of the cooling impact of earlier rate hiking still yet to impact on the commercial property market.
We believe that the full impact of all the interest rate hiking will feed into the market during the course of 2023, slowing demand for commercial property financed by mortgage borrowing. Late in 2022 and early in 2023, we had seen FNB’s Property broker surveys hinting at the start of slowing property sales activity, and we believe that there is more to come in 2023, and that this will feed into slower new commercial property mortgage lending.
This interest rate hiking comes at a particularly inconvenient time, with a slowing world economy also taking its toll on the South African economy, along with ongoing heightened load shedding exerting pressure on the economy, and property owners and tenants. Therefore, apart from the direct impact of rate hiking on slowing commercial mortgage borrowing growth, it also takes its toll on the financial strength of the commercial tenant population, which itself has other forms of debt and who’s clientele is weakened by the slower economy.
Thirdly, the direct impact of interest rate hikes on consumers’ disposable income, along with the impact of the higher inflation that caused the rate hiking, is a key negative for consumer spending and thus for retail property. The situation is likely to be similar in the Hotel Property market where aspirant holiday makers may spend more conservatively on holiday travel in these tougher financial times, and hotel revenues are still battling just to get back to pre-Covid 19 lockdown levels.
In short, cumulative interest rate hiking to date is likely to see demand for mortgage financed commercial property slow further, the commercial property market soften, and property income growth come under increased pressure, with vacancy rates possibly rise once more as tenant financial pressure increases.
Interest rate hiking to date is expected to play a key role in this market weakening in 2023, although it is not the only “headwind”, a battling world economy and high load shedding being the other negative factors.
On the residential development side of the market, new building planning has already been declining and this latest rate hike will probably reinforce that declining trend.
On the residential rental market side, earlier interest rate hiking gave some mild support to the rental market, as aspirant buyers postponed their home buying and remained in the rental market for longer. But given the increasingly severe magnitude of interest rate hiking since late-2021, we believe that the earlier recovery in the rental market may now stall, with the tenant population beginning to experience increased financial pressure in a significant weaker economic environment.
