Read time: 2.45 mins
Explore the Economics Driving Commercial Real Estate
The global real estate market is predicted to expand from $45.3 trillion in 2020 to $69 trillion by 2030.1 This growth has made it clear to investors that now is the time to act and diversify their portfolios, but before this can happen, they need to understand the economic forces driving commercial property development today. Factors such as inflation rates, interest rates, and the Consumer Price Index (CPI), for example, all influence the risk-and-return on commercial property, and should be taken into consideration before investing.
Find out more about the macro- and microeconomics of the property market with Francois Viruly, Guest Expert on the University of Cape Town Financing and Valuing Commercial Property online short course.
1PwC (2020).
Transcript
If we look at the property market, and, very quickly there are a few things that come to the fore. First of all, economic growth: if you have a poorly performing economy, you can’t expect the property sector to actually do well. And always remember that we have a property cycle, and that property cycle moves up and down. As the economy grows, you would expect the demand for space to rise, and hence vacancies too, to drop. And then we’ve got a few others. The property market is very sensitive to interest rates. As interest rates start shifting, it impacts. Why? Because there’s a lot of debt funding in the property market. And then the other macro indicator to look at very carefully is, of course, the inflation rate. Many of the rentals that we have in the property market are influenced by the CPI, the consumer price index, and often rentals in the contractual obligations, we actually put an escalation in that is influenced by the inflation risk.
Learn about the macroeconomic drivers in South Africa
Macroeconomics is the big picture. It’s exactly what we’ve just been discussing: GDP numbers, the inflation numbers. And then we have microeconomics. Microeconomics is the business of real estate. And I think those micro—and the one that we probably hear the most about is location, location, location. Location is a micro issue. It’s decisions that are made as to where am I going to have my real estate? What town, what suburb? And I think those are the micro. At the end of the day, the property owner is trying to maximise the net operating income, the income of the property.
Part of that will be your operating costs, which you are trying to reduce as much as possible. And that will be influenced by costs of cleaning, security, and your municipal charges. So, I think that we’ve got the big picture through the macroeconomy, and then, as a good property practitioner, you will be influenced by the micro issues and, in particular, whether your tenant is going to pay rent, how much rent is going to be paid, and when that rent is going to be paid.