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The still-bigger 75 basis point hike announced this afternoon, after the previous 125 basis points’ worth of rate hikes at prior meetings, makes the cumulative impact on interest rate hiking significant to date. In addition, one must add the rising inflation impact on the economy, especially in fuel price, and the entire potential impact becomes still more significant.
Increasing the magnitude of interest rate hiking to 75 basis points could likely dampen property investor confidence in the near term.
In the 2nd quarter FNB Property Broker Survey of April, we had already seen signs of slowing demand and sales activity in the area of Office and Retail Property. We expect this further interest rate hike to sustain that weakening pressure on the demand for properties in those 2 sectors. In addition, it is becoming possible that the near-term slowdown in demand broadens to the outperforming Industrial Property Class too, and we expect this property class to see some cooling in its sales activity.
The FNB Commercial Property Broker Survey also pointed to declining vacancy rates in all 3 major commercial property sectors earlier in the year. We expect that this decline may stall following this more recent rate hiking, with business expansions slowing.
This ongoing interest rate hiking is expected to lead to a continuation in the multi-year “upward drift” in property capitalisation rates, via their exertion of upward pressure on long bond yields. This in turn leads us to expect that 2022 will be another year of real (inflation-adjusted) decline in average capital value for commercial property as a whole, albeit perhaps not all-out nominal value decline.
On the residential rental market side, we remain of the belief that the interest rate hiking is mildly supportive of a rental market strengthening, tenant demand being supported by a portion of aspirant home buyers delaying their purchase until rates have finished rising.
However, the rate hiking is expected to lead to near term slowing in the pace of new residential development.
Within the retail property sector, the financial pressure that rising inflation and interest rates brings is expected to force a reprioritisation of consumer spend partly away from non-essential and postpone-able items expenditure.
We believe it plays into the hand of the smaller convenience centres that are more focused on essentials such as food and groceries, and away from those more focused on non-essentials such as entertainment and luxury goods. We believe that on balance this environment is more of a negative for the larger regional mall size categories, which often focus to a greater extent on such non-essentials and postpone-ables to a greater extent than the smaller sized categories.
Finally, commercial mortgage advances growth recently hovering at between 2-3% year-on-year growth, could also be expected to slow in the near term.