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The war in Ukraine’s effect on commercial property could be significant. PICTURE: MIKITA YO/UNSPLASH
Letter from the editor Having a chat with one of the country’s top local manufacturers, I realised just how hard hit many businesses are from recent events. A pandemic followed by a war
Potential impact of war
is not good for anyone, he said, speaking to me in the same week we saw rising petrol prices and watched Russia invade Ukraine. The war may seem far away, but the man, whose business operates from prime commercial property, said he was already feeling the pinch. “It’s hard to be in business and cope right now.
Economist considers what the crisis in Ukraine could mean for South Africa’s property sectors
We are haemorrhaging cash.” He’s not alone. The slight glimmer of hope seen as we emerged from stringent anti-Covid restrictions may very well go out if the realities of war, and an ailing world economy, spread. While it may seem like a picture of doom and gloom I was encouraged to watch how this man was hustling to stay relevant and to make his products affordable to a consumer whose purse strings already have little room to manoeuvre. John Loos, an FNB economist, says we are safe right now, but if the war is prolonged, we could all be hit, and this will have a ripple effect on all property sectors, including commercial and residential. I draw courage, however, from what we have survived in the past two years, and the resilience and creativity we have shown. If anything the human spirit is far stronger than we can even fathom and has risen above the harshness of world events. So too, is the spirit of the property sector, itself having surfed a tsunami to return as positive as always. Remembering what this sector has survived should give us courage, come what may. Warm regards
Vivian Warby vivian.warby@inl.co.za
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BY JOHN LOOS
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T IS TOO early to say how the Russia-Ukraine war will affect the local property market but it is unlikely to escape unscathed. This is so, particularly if it carries on for some time, and depending on the effect of global sanctions, boycotts and the reaction to them. The main potential impact points are via upward pressure on cap and vacancy rates, downward pressure on rentals and thus property incomes, as well as possible additional upward pressure on operating costs. Added to this is an inflationary impact of some magnitude which, in turn, heightens upside risk to both short and long-term interest rates, along with potential downward pressure on global economic growth. However, there are some obvious potential impact points on the domestic property market. First, the conflict appears likely to add to already troublesome global inflationary pressures, notably energy prices. Potential energy-supply disruptions in the region, in part as a result of the conflict but also due to potential sanctions and boycotts against Russia, a key oil and gas producer, have seen energy prices rising significantly. The recent Brent Crude price levels are approximately 124% above the end of 2020 levels and, in South Africa, petrol prices have already been skyrocketing. Coupled with this, the escalation of sanctions and boycotts against Russia and some allies, and potential retaliation, could exacerbate broader supply-chain disruptions globally, which could be inflationary. Domestic agricultural economist Wandile Sihlobo sees potential food price inflation, because Ukraine is a key agriculture producer. He points to maize, wheat, soybean and sunflower oil prices being significantly up from a year ago. An inflationary effect on local food and petrol prices, as well as a possibly more widespread inflation impact from general global inflationary pressures, is probably
a negative, not only eating into consumer incomes, but also because of greater upside risk to interest rates, given the South African Reserve Bank’s inflation target. So, what then are the potential impact points for the domestic commercial property sector should such an economic scenario play out? C A P I TA L I S AT I O N R AT E S Given the partial link between short-term interest rates and long bond yields, on one hand, and property capitalisation rates on the other, some negativity around inflation prospects as a result of the Russia-Ukraine conflict has led to some sell-off of South African government bonds. The average yield for 10-year bonds had risen from 9.26% as at February 25 to 9.665% as of March 4. While this is not a major sell-off in bonds, it does suggest that the crisis will exert upward pressure on local property capitalisation rates, and so be a negative for property valuations. V A C A N C Y R AT E S After rising average vacancy rates in all three major commercial property markets – industrial, retail and office – in recently years, the FNB Property Broker Surveys late last year were pointing towards a possible stabilisation in retail and office vacancy rates and a decline in industrial property vacancy rates. South Africa’s economic situation is fragile, however, so any major global recessionary impact on the domestic economy could easily see vacancy rates rising once more. While industrial property may weather an economic storm of moderate proportions, the fragile retail and office sectors, challenged by increasing online retail and remote working, could see renewed weakness that could return them to rising vacancy rates and further downward pressure on rents. All three sectors could see economic pressures greater than would have been the case without the Russia-Ukraine war.
Industrial property’s link to the global economy is strong via warehousing and logistics space for imports and exports, as well as the local manufacturing sector’s strong trade links to the rest of the world. The retail sector’s links to the global economy are more indirect, with rand weakness and higher global inflation partially bringing imported inflation into consumer goods prices, notably for food and petrol. Apart from higher inflation eating into consumer incomes, rising interest rates lift the cost of servicing debt, further eating into incomes. The war could potentially add to these pressures. The office market is arguably the least directly exposed to the potential impact of the war, although it does house certain tenants who trade with the world. However, its potential impact is more indirect, via the slowing economy affecting the number of office jobs, in turn exerting pressure on office space demand. Higher interest rates, too, would exert additional pressure on both the landlord and tenant populations. P R O P E R T Y V A L U AT I O N S It is too early to tell if the magnitude of the potential economic and interest rate impact will be sufficient to delay the expected return in the All Property Average Capital Value (MSCI data) to positive nominal growth this year. The negative impact of the war will be pushing against the lagged positive impact of a normalisation in economic activity, and some economic recovery, following the deep 2020 lockdown recession. Can the impact extend as far as property operating costs? The indirect impact could conceivably indirectly impact operating costs, via the inflationary impact feeding through to service provider costs. l Excerpts from an opinion piece by John Loos. Loos is a property strategist at FNB Commercial Property Finance.
THE POTENTIAL RESIDENTIAL RENTAL MARKET IMPACT MILD additional upward pressure on interest rates, over and above what would have been the case in the absence of war, could see additional impetus provided to the expected rental market recovery. We have expected that the rental market will strengthen as interest rates rise, with the economy and tenant payment performance both recovering after the hard lockdowns, and a greater group of potential home buyers postponing their purchases to remain in the rental market while rates rise. But, for this to continue, the negative economic impact of rising interest rates, and any additional Ukraine impact, must be mild at worst. Too big an inflationary and interest rate impact exerts financial pressure on tenants, and then all bets of recovery in this market are off. It’s a fine balance. – John Loos
VULTURE INVESTORS CIRCLE RUSSIAN ASSETS AS SANCTIONS TIGHTEN IN THE world of the ultra-rich, phones are lighting up about purchasing – at potentially bargain levels – assets of Russians in the UK at risk from sanctions. Bloomberg reports that opportunistic investors and estate agents are asking: “Who’s selling and for how much?” The inquiries, coming as Russia’s invasion of Ukraine is two weeks old, highlight the fast-moving nature of a geopolitical crisis that has seen Russian President Vladimir Putin’s country choked off from global financial systems and has erased billions from the fortunes of Russia’s wealthiest elites. The assets facing the sharpest scrutiny from government leaders are Russian oligarchs’ real estate, private jets and yachts. The UK has become a hot spot for rich Russians in recent years, with many lured to London by its abundance of luxury properties as well as private hospitals and schools. Popular areas include Eaton Square in Belgravia – sometimes called “Red Square” – and St George’s Hill in Surrey, where homes are priced at more than £10 million (about R200m). Now some Russian owners of London properties are struggling to refinance their mortgages, according to a person familiar with the matter. Banks are concerned about their exposure to Russian individuals and refusing to lend, forcing the owners to consider selling, said the person, who asked not to be identified, citing confidentiality agreements. Bloomberg also reported that UK government reforms this week focused on lifting the veil of secrecy around corrupt real estate ownership. These are the first steps toward potentially seizing assets. Properties in London have proved a convenient and safe place to stash Russian fortunes. Hereon, anonymous foreign beneficiaries of UK real estate will face restrictions on selling if they hide behind shell companies. Whether these changes lead to a sudden outbreak of transparency in the property sector remains to be seen. – Bloomberg
DISCLAIMER: The publisher and editor of this magazine give no warranties, guarantees or assurances and make no representations regarding any goods or services advertised within this edition. Copyright ANA Publishing. All rights reserved. No portion of this publication may be reproduced in any form without prior written consent from ANA Publishing. The publishers are not responsible for any unsolicited material. Publisher Vasantha Angamuthu vasantha@africannewsagency.com Executive Editor Property and Environment Vivian Warby vivian.warby@inl.co.za Features Writer Bonny Fourie bronwyn.fourie@inl.co.za Design Kim Stone kim.stone@inl.co.za
