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The impact of a ratings downgrade on Industrial Property

The decision by international ratings agency Moody's to place South Africa's Baa2 bond and issuer ratings on review for downgrade has serious consequences on the short- to medium-term property market. If South Africa gets downgraded it will be one notch away from junk status and this is not a position we want to be in.

If this indeed does happen, the immediate repercussions will see the rand grow weaker as investors and lenders pull out of South Africa. Many foreign investors are only mandated by their backers and funders to lend in certain markets and a downgrade may trigger a significant number of these mandates to force them to withdraw the investment.

Positive sentiment in our economy assures foreign investors that their investments are stable and that growth is a probability. As soon as international ratings agencies lose confidence in our forecast so too do global investors.

Higher interest rates

This will undoubtedly force higher interest rates to counter the weak rand and exit of investment. Higher interest rates will reduce affordability for potential buyers. Coupled with this, the consumer will be hard hit with increased prices of most items, for example electricity as Eskom pays more interest on debt and capex. As prices start to increase, warehouse vacancies will invariably rise and rentals will drop. Smaller business will start to exit the market or downscale. This trend is becoming increasingly more evident over the last few months. 

Buyer sentiment will turn very negative and even local people will be scared to invest in the country. The high rates, low affordability and negative sentiment will slow the market down significantly.

The silver lining is that foreign buyers will find it easier to buy here with the weak rand, but given the small percentage of foreign buyers, this will not reverse the negative trend. So, we really have to hope that Finance Minister Pravin Gordhan can convince the ratings agencies that we are going to be able to stimulate growth and cut spending.

For those with future confidence more industrial properties will invariably come onto the market which will please local investors and owner occupiers that have struggled to find opportunities over the last 12 months.

If our current political climate improves these problems will not be with us for more than a year or two, and our economy will regain stability and grow stronger. If however, we do suffer a downgrade, it may well take five years before a satisfactory ratings upgrade!

For more information on purchasing, renting or investing in commercial and industrial property in Cape Town, please contact Robert Ryll | Cell Number: 082 374 2662 | Landline: 021 552 4100 or Email: rob@primeindustrial.co.za


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