Commercial property

Impact of rising interest rates on SMEs, agriculture and commercial real estate

A 50 basis point larger rally leads us to expect a further slowdown in commercial real estate sales activity in the second half of 2022, says John Loos, real estate strategist at FNB Commercial Property Finance .

The South African Reserve Bank’s decision to raise the repo rate by 50 basis points (bps) to 4.75% means that smaller businesses will likely have to absorb short-term costs as their profit margins are already under pressure due to rising fuel prices and power cuts.

According to John Loos, real estate strategist at FNB Commercial Property Finance, a 50 basis point bigger hike, after 3 x 25 basis points of rate hikes in previous meetings, leads us to expect a further slowdown in prices. sales. activity in the commercial real estate sector in the 2nd half of 2022, while the recent declines in vacancy rates could stall due to a slowdown in the growth of demand for new commercial spaces.

He says we also expect this continued rate hike to keep average commercial property capital value growth in the mid-single digits, which will translate into negative growth in real terms (adjusted for inflation).

“We expect the pace of new residential development activity to slow in the second half of 2022 in a lagged response to the interest rate hikes already implemented, and with further hikes expected.

Finally, we believe that the residential rental market could continue to strengthen moderately, with this component of the residential market generally benefiting from a moderate rise in interest rates, as a portion of aspiring buyers choose to delay their purchase and rent space instead,” Loos said. .

Rising rates eat away at farm margins as policy normalization gathers pace

Paul Makube, agricultural economist at FNB Agri-Business, says the decision to raise the rate immediately increases the cost of debt and farmers therefore face increased debt service charges, which will erode margins. beneficiaries.

The sector has faced enormous input cost pressures due to war-induced escalation in the price of fertilizers, herbicides, pesticides and fuel. Total agricultural debt stood at R191 billion in 2020, which has increased with a compound annual growth rate of 10.4% over the past five years.

Harvesting of summer grains and oilseeds has started and will accelerate in the near term, and rising fuel prices will increase operating costs.

In addition, as fertilizer prices have risen sharply in 2022, farmers will be forced to increase their debt requirements in preparation for the new planting season and subsequently higher debt costs due to rising debt. interest rate.

Nevertheless, the agricultural outlook remains positive for the coming year.