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Boston, MA -- (SBWire) -- 10/24/2013 --While South Africa's commercial real estate sector faces headwinds in terms of faltering macroeconomic conditions, a volatile currency, inflation concerns and tepid development pipeline, it remains one of the brightest commercial real estate prospects in the region.

Commercial real estate is dependent on a healthy macroeconomic environment. South Africa's economic prospects have deteriorated amid rapid currency depreciation and rising tensions in the critical mining sector. We are forecasting real GDP growth of 2.3% in 2013 and 3.3% in 2014, with risks weighted firmly to the downside. Poor economic growth affects the sector as it dampens both property fundamentals and capital markets, putting downwards pressure upon tenant retentions, rental growth, yields, development activity, financing and asset values.

With a focus on the principal cities of Johannesburg, Cape Town and Durban, the report covers the rental market performance in terms of rates and yields and examines the commercial office, retail, industrial and construction segments throughout the country in the context of an industry, which in spite of tepid indicators, is performing well in regional terms.

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In general, demand is stable as South Africa due to its position as an attractive regional base, resulting in high occupancy rates and increasing rents. Nevertheless the development pipeline remains well below pre-2010 levels. As such, we expect favourable absorption-completion dynamics will buoy the leasing sector in the short term, but unless development activity picks up this indicator will serve as a hindrance to long term growth.

With the construction sector still in a period of stagnant growth, we see few opportunities to lift the industry out of the quagmire. For real estate firms with a higher dependence on the construction side, the risks are greater than for those with a portfolio of leasable space, as the slowdown in the project pipeline will go some way to rectifying the imbalanced supply and demand dynamics.

Key Points

- In line with our projections, South Africa's 2012 real construction growth came in at 2.5% year-on-year. This lends credence to our view that the slump has finally reached a bottom and that the construction sector is timidly returning to growth. However, despite President Zuma's effort on infrastructure investment, we maintain our cautious outlook for the medium term, with a forecast average annual real growth of just 3.5% between 2013 and 2017, due to difficulty in raising capital for projects, social unrest and populist policies.
- South Africa's economic prospects have deteriorated amid rapid currency depreciation and rising tensions in the critical mining sector. We are forecasting real GDP growth of 2.3% in 2013 and 3.3% in 2014, with risks weighted firmly to the downside.

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