John Loos
Recently the SARB Monetary Policy Committee (MPC) lowered its policy repo rate by 25 basis points, from 7.75% to 7.5%. This marks the third consecutive 25 basis point rate cut since the easing cycle began at the September 2024 MPC meeting, bringing the prime lending rate of commercial banks down to 11%.
Key Implications for the Commercial Property Market:
Gradual Boost to Investment Demand
- While a single 25 basis point cut may have a limited impact on commercial property investment demand, this marks the third in a series of mild reductions. Cumulatively, these cuts may be starting to make a noticeable positive difference, with investor demand expected to strengthen further in 2025. Late in 2024, FNB’s Property Broker Survey indicated a perceived increase in sales activity, and continued rate cuts are likely to support further growth in transaction volumes this year.
Interest Rates vs. Economic Growth Impact
- The commercial property market is typically more closely correlated with economic growth than with interest rate movements, unlike the more rate-sensitive residential sector. Thus, a significant portion of the impact from rate cuts is expected to be indirect, stimulating real economic growth, which in turn, drives demand for commercial space, improves property income, and enhances investor appeal.
Office Property Market: A Mixed Outlook
- Lower interest rates can support the office market in two ways. First, if rate cuts drive economic recovery, they may spur employment growth in the Finance, Real Estate, and Business Services (FIRE) sector—one of the primary drivers of office space demand. Second, rising demand for high-density residential properties could accelerate office-to-residential conversions, helping to reduce office space oversupply. However, despite a likely increase in investor interest, the office market is expected to remain oversupplied throughout 2025, making it the underperformer among the three major commercial property sectors.
Retail Property: Strengthening Performance
- For retail property, interest rate cuts provide a dual benefit: directly increasing disposable income and indirectly supporting the economy. Combined with lower consumer inflation, this is likely to drive faster real (inflation-adjusted) disposable income growth in 2025, leading to increased retail spending and improved financial performance for retail centers.
Industrial Property: Continued Outperformance
- The industrial property market—particularly the warehousing and logistics segment—is also expected to benefit. If retail sales improve due to increased consumer spending, demand for industrial space should rise accordingly. Additionally, lower interest rates could boost buyer and investor interest in this sector. However, with industrial property vacancy rates already low and new building activity higher than in other sectors, there is some risk of oversupply.
Declining Vacancy Rates and Rental Growth
- Across all three major commercial property sectors, lower interest rates are expected to contribute to declining vacancy rates in 2025. Industrial properties are likely to maintain the lowest vacancy rates, while office properties will take longer to stabilise. Lower vacancies should lead to stronger rental growth, improved operating income, higher total returns, and increased investor demand.
Implications for the Residential Market
- A Softer Rental Market . The residential rental market may experience a mild weakening due to interest rate cuts. As borrowing costs decrease, some tenants are likely to transition into homeownership, leading to a slightly higher national vacancy rate. While this shift supports home buying activity, it presents a more challenging environment for landlords.
Residential Development Recovery Lag
- The residential development sector is expected to take longer to recover. New building activity declined sharply due to interest rate hikes from 2021 to 2023, and while recent data suggests stabilisation, a strong rebound is not yet evident. Stats SA’s building plans data shows that while residential plans passed were down by -23.6% in Q2 2024, the decline had moderated significantly to -1.92% by the three months ending November 2024 (with December data still pending).
Outlook for Commercial Mortgage Lending
- Increased Demand for Commercial Mortgage Credit. For commercial mortgage lenders, we anticipate an acceleration in mortgage advances growth, moving from low to higher single-digit territory. Interest rate cuts are expected to drive increased demand for commercial credit. As of December 2024, year-on-year growth in commercial mortgage advances had already risen to 5.3%, up from a 2024 low of 3.25% in June.
John Loos – Senior Economist: FNB Commercial Property Finance. He writes in his personal capacity.
