From time to time, South Africa’s property market has been described as “resilient” despite weak economic fundamentals. It’s true that we haven’t seen a sharp market crash in recent years, and property market valuations typically correct more slowly than other asset classes. However, a closer look at long-term commercial property performance reveals a significant multi-year cumulative correction, largely in response to over a decade of economic stagnation. Recent property indicators arguably reflect the country’s ongoing economic weakness to a significant degree, with relative underperformance evident across multiple variables.
Let’s delve into the extent of this multi-year correction:
South Africa’s economic growth entered a prolonged period of stagnation from around 2012, following a post-GFC (Global Financial Crisis) peak of 3.2% in 2011. More recently, the economy has averaged just 0.4% annual growth between 2020 and 2024. While the Covid-19 lockdown disruption was an abnormal event, growth has nonetheless remained below 1% per annum in both 2023 and 2024. This persistent weakness can be attributed to the country’s many structural economic constraints.
We contend that the property market has corrected significantly in line with this weakness—but to appreciate the full extent, one must analyse the data correctly. MSCI’s annual data for 2024 showed an improvement in the All-Property Total Return (income return plus capital growth), a pleasant surprise at a time when the economy recorded a second consecutive year of sub-1% real GDP growth. Still, the 11.9% return in 2024, while the first double-digit return since 2017 remains well below the 16% peak recorded in 2013.
The market’s relative weakness becomes clearer when examining capital values and net operating income in real(inflation-adjusted) terms.
From around 2015/2016, the commercial property market began showing signs of broader weakness, believed to be a lagged response to the long-term stagnation in economic growth. On the surface, one might note that all-property net operating income grew by 33.5% between 2016 and 2024, and average capital value per square metre rose by 27.7%. But these are nominal figures. Once we adjust for economy-wide inflation using the GDP deflator, the picture changes drastically: real net operating income declined by -15.2%, and real capital value per square metre declined by -18.9% over the same period. These are significant cumulative corrections.
However, these real declines in income and capital value don’t fully capture the extent of the market’s weakening. What helped prevent even more extreme declines was a marked reduction in new commercial property development. In 2024, the square metreage of non-residential building plans passed was -30.6% lower than the multi-year high in 2016 and a massive -46.4% below the 2008 multi-decade peak. Similarly, the square metres of completed non-residential space in 2024 were -48.9% below the 2017 high and -62% below the 2008 peak. In fact, 2024’s completion levels were lower than in most years of the 1990s a period when the economy was significantly smaller , illustrating how subdued construction activity has become.
In short, the property market has not been immune to the impact of long-term economic stagnation. This stagnation is reflected not only in declining real capital values and net operating income but also in the sharp contraction in new space supply. The limited addition of new space helped contain vacancy rates to some extent, thereby cushioning the decline in real income per square metre. As a result, the All-Property Vacancy Rate in 2024 stood at 6.5%—not extreme, and slightly below the 30-year MSCI average of 6.7%.
Looking ahead , the recent series of interest rate cuts is expected to mildly strengthen market conditions in 2025 compared to 2024. However, a strong and sustained recovery will depend on achieving significantly improved economic growth. FNB forecasts modest improvement, with growth rising from 0.5% in 2024 to 1.1% in 2025, and reaching 1.9% by 2027. It also anticipates that interest rates will likely move sideways for a protracted period following one more expected 25-basis-point cut in the second half of 2025.
While this expected mild improvement in the economic and interest rate environment is welcome, it may not be sufficient to support sustained real (inflation-adjusted) growth in property income and capital values through the forecast period to 2027.
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