This bubble is at the verge of bursting as cheap credit comes to an end

by , 21 September 2017
This bubble is at the verge of bursting as cheap credit comes to an end
Drive through Sandton, Rivonia, Sunninghill or on the N1 between Pretoria and Johannesburg and you'll see literally hundreds of new office buildings, malls and smaller shopping centres being built.

And following a recent drive through Cape Town and Somerset West I saw the same thing.

Buildings are popping up everywhere.

The FNB/BER Building Confidence Index just hit its highest level in a year (based on end of March 2017 data, which is the most recent). And this is despite of South Africa's economy moving into recession…

The Fourways Precinct has a mall planned that'll cost R2.4 billion in total. Waterfall City and Steyn City envision being R50 billion+ developments within the next 10 years, and the Menlyn Maine project in Pretoria will cost at least R10 billion.

This simply cannot continue. It's been made possible by the lowest interest rates South Africans have seen in decades. But a combination of rising interest rates, the junk status downgrade and low consumer confidence will see this construction bubble pop in the coming year.

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Vacancies in the commercial property sector are rising – and developers are losing money
According to the South African Property Owners Association (SAPOA), 111,000 square meters of office space were added in the first quarter of 2017. At the same time only 32,000 square meters of that was taken up. This means that in net terms, 78,000 square meters more office space stood empty at the end of the first quarter in 2017. At a typical rate of R85/sqm that’s a total loss of R80 million a year to property owners – and that only reflects the amount by which vacancies grew.
Office vacancies are at their highest level in a decade 

This now brings total vacancies in the sector to 11.1%, an increase from 10.7% in the previous quarter.
Sure, there are new buildings being built, and filled up. But they aren’t being filled by new businesses thanks to a growing economy. They are being filled by existing businesses moving from other sites. Leaving the old properties empty.
Consumers just aren’t willing to increase their spending

South African consumer confidence is at its lowest levels ever, and are still dropping.
That means people aren’t willing to spend their money – and that spells trouble for retailers.
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High vacancies and more construction means trouble for this sector
In the short run, there’s still many construction projects, building offices and malls.
That will spell higher vacancies, and I would be very loathe to invest in retail and office specialising property funds, unless they have very low levels of gearing.
But the big bust will come for construction companies.
The day is fast nearing where the funding will dry up for these new projects. They’ll experience a sudden standstill in new construction as we wait for the economy to play catch up.
More jobs are needed and more industries need to grow for all these offices to be filled and retailers to thrive again.
For now, it’s not something I’d bet on.
If you’re invested in the property sector, make sure it is in companies with diverse income streams and low levels of debt – because the recession will take its toll.
Here’s to unleashing real value
Francois Joubert

This bubble is at the verge of bursting as cheap credit comes to an end
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