The Repo Rate Hike: What This Means For The Commercial Property Sector
The Repo Rate Hike: What This Means For The Commercial Property Sector
The South African Reserve Bank recently announced an increase in the repo rate by 25 basis points to 3.75%. This is the first rate hike since 2018.
Why has the repo rate gone up?
The repo rate has increased because of the changed inflation outlook with CPI having moved up to 5%, nearer the upper band of the inflation target. This is driven by increases to the basket of goods tracked but most importantly the price of fuel… Which is completely outside of our control. These are external factors that our CEO, John Jack believes is of concern. “Oil prices are not governed by South Africa and the demand leads to increased inflation and ultimately interest rates,” says Galetti CEO John Jack.
What does this mean for the commercial real estate sector?
A repo rate increase is not favourable to the commercial real estate sector, as the industry needs rates to remain flat to encourage recovery after the challenges of the COVID-19 pandemic. “At this stage, we actually need the rates to remain flat to have any chance of recouping our losses. The repo rate hike will close the loop on high valuations placed on prime real estate assets.” This means that commercial property sellers who want to sell high will need to act quickly – or risk missing out.
The link between rate increases and yields
Yields are used to determine the relative value of a commercial property asset. The lower the purchase price compared to net income the higher the yield or return. Yield is an important factor to consider when buying commercial property. Investors will look for the most favourable ratio between the yield they can get the commercial property for and the best interest rate they can finance it at. As interest rates move upward it closes that gap until yields adjust upward accordingly.
What options are available to commercial real estate landlords?
“Landlords who are already under pressure to service their debt from tenant vacancies are going face increased pressure as cash flow is tightened,” says John. The best option in this current market is to find an owner-occupier looking to buy the property at a strong pricing level, using an experienced broker. “This is usually a better price than an investor would pay but still attractive to the occupier given some of the best pricing of assets we have seen in years,” John concludes.