Property Investments Will Be More Attractive Once Interest Rate Cuts Start to Roll

From September this year, several central banks globally are expected to deliver their first interest rate cuts in many years. US Federal Reserve Chair, Jerome Powell, recently indicated that “the time has come for policy to adjust,” signalling the possibility of a shift in interest rates.

While an interest rate cut depends on the US consumer inflation rate reaching the central bank’s 2% target and the state of the labour market, market watchers have interpreted Powell’s comments as a sign that the US Federal Reserve may cut interest rates by 25 to 50 basis points at its mid-September meeting.

Implications for South Africa

The South African Reserve Bank (SARB) is likely to watch these developments closely. It appears that the SARB has been waiting for the US Federal Reserve to act before beginning its own interest rate-cutting cycle.

Several recent economic developments suggest that SARB could be preparing for an interest rate cut in September—the first since it began raising rates in November 2021.

Key factors supporting this shift include:

• South Africa’s consumer inflation rate dropped from 5.1% in June to 4.6% in July, bringing inflation closer to SARB's 3% to 6% target range.
• Food and transport price inflation declined significantly.
• Fuel prices have dropped for four consecutive months, providing relief to consumers.

These factors have led economists to predict an interest rate cut of 25 basis points at SARB’s 19 September 2024 meeting, bringing the repo rate to 8%. Additionally, three more cuts of 25 basis points each are expected by mid-2025.

Impact on Property Investments

According to Calvin Crick, Managing Director for Transaction Services at Cushman & Wakefield | BROLL, a long-awaited interest rate cut will have a transformative effect on the commercial property sector.

One of the direct benefits that property owners and investors will notice is lower borrowing costs, which will make it cheaper to finance property purchases. Crick believes that lower financing costs will increase demand for commercial properties, as the property sector is capital-intensive and any reduction in borrowing costs will be welcomed.

In a low-interest rate environment, more investors are likely to purchase properties, which could stimulate the overall commercial property market. Crick says that cheaper financing options may lead to an increase in property transactions and development projects, which in turn will boost South Africa’s economy.

Higher Property Values and Profitability

Crick notes that low interest rates typically lead to higher property values. This is because a lower discount rate, which is used to value future cash flows from rental income, results in higher present values of property assets.

Additionally, lower interest rates will lead to reduced debt repayments for property investors. This means that once property costs (including debt repayments) are subtracted from rental income, investors could generate higher returns. As a result, commercial properties will become more attractive investments in a low-interest rate environment.

Crick concludes:"This shift will make commercial properties more appealing, offering investors the chance to capitalise on the combination of lower financing costs and higher property values, leading to increased profitability in the sector."

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