MSCI, a leading provider of investment decision support tools worldwide, including indexes, portfolio risk and performance analytics and ESG research, has released the MSCI South Africa Annual Property Index, which shows the South African property investment sector delivered an ungeared total return of 7.9% in 2019. This is down from 10.1% in 2018.

The softening in total return recorded for 2019 was driven by a decline in capital growth of -0.3% relative to the 1.6% recorded for 2018. As expected, the first decline in capital growth since 2002 was a reflection of the tough macro environment and increasing pressure on operating income growth driven by slowed demand and high administered cost inflation.

Meanwhile, income returns declined to their lowest level since 1995, down to 8.1%. This remains in line with the global trend where yields across most geographies are at record lows. Historically low income returns on the back of capital declines have sharpened investor’s focus on asset valuations, particularly in light of 2020’s expected lockdown net income shocks.

At a sectoral level, Industrial continues to outperform on the domestic front replicating the trends seen globally.  Industrial property was the top performer during 2019 with a total return of 10.0%, followed by residential (+7.9%) and retail (+7.6%). The office sector continued to lag during 2019 with a total return of +6.8%.

At an overall level, the South African commercial property vacancy rate increased 40basis points to 6.8%. The lower occupancy rate had a negative impact on base rental growth and provided further impetus to cost efficiency programmes, aggressive tenant retention strategies and improved cost recoveries.

The latest MSCI South Africa Annual Property Index, sponsored by Absa Commercial Property Finance is based on asset level data collected from a sample of 2,566 properties across 29 portfolios with a total capital value of R443 billion at the end of December 2019. This represents approximately two thirds of professionally managed investment property in South Africa.

Phil Barttram, Executive Director, MSCI, comments: “Global real estate is in uncharted territory, assailed by short term income shocks and the potential of long term structural shifts in the way real estate is used. Deciphering how much of the impact is structural or cyclical will influence critical investment decisions in the short term. That said, the nature of direct real estate investment has not changed. Total Returns are dependent on how capital is deployed for maximum income return over the long term. South African real estate has the sophistication and capability to weather the storm.”

Sponsor comment: Klaus-Dieter Kaempfer, Head: Commercial Property Finance and Equity Investments, Absa said,” Absa Commercial Property Finance is proud to sponsor the publication of the MSCI South Africa Annual Property Index. The results presented are a unique source of empirical data reflecting the performance of the property sector in South Africa. This sponsorship enables us to invest in a tool that creates transparency in the property market, thus enabling the South African property market to benefit from information that enables participants to make decisions informed by real data.

We have noted growth in lending towards clients in sectors such as warehousing and distribution centres, affordable housing, retirement estates, student housing and inner city regeneration projects. These trends are consistent to trends in the MSCI South Africa Annual Property Index, which shows that industrial properties have outperformed other sectors, followed by the Residential sector.