The case for investing in Cape Town Commercial Property this year

Property investors are watching the South African economy carefully, especially with a landmark election coming up in May, as they weigh the benefits of investing in commercial property in the country’s various metros.

As many other cities experience service delivery difficulties and decaying infrastructure along with rising crime rates, Cape Town commercial has not only kept its head above water but is also outperforming virtually every other city when it comes to several key property investment metrics.

In this article, we examine some of the latest data to paint a comprehensive picture of the local commercial property market and review some of the opportunities that it presents to investors in 2024 and beyond.

Another tough year for SA – with Cape Town offering a glimmer of hope

2024 marks South Africa’s 30th year of democracy, and the stark reality is that in many parts of the country, citizens and businesspeople alike continue to wonder what direction the country is heading in.

Crime rates have risen markedly in many parts of the country while the unemployment situation and the erosion of middle-class wealth  – coupled with the decay of government services in formerly prestigious areas including Johannesburg – giving the country cause for concern.

Despite modestly positive news on the inflation front, with CPI at 5.1% in January, this year, there are still significant headwinds facing the economy.

GDP growth is expected to stutter along at 0.9% percent this year, making the prospect of rapid economic expansion driving a powerful recovery remote at best. This is especially true when the cause of lacklustre economic performance has a lot to do with the country’s aging and decaying infrastructure, weak currency, and general investor pessimism.

While other parts of the country struggle to revive a stalled economy, the western Cape continues to be a favourable exception. Decades of effective government and service delivery have created an oasis of stability in Cape Town, which is bearing fruit in the form of consistent growth, low unemployment and a booming commercial property sector.

  • Cape Town’s economy grew at an average rate of 1.1% over the past decade, against 0.8% in the country overall
  • More impressive than the province’s growth rate – which is constrained by the national economy – is the unemployment rate of 25.9% which is almost half the national average.

All of these factors help to explain the increased demand for office and industrial space throughout the Cape peninsula.

In particular, warehousing and logistics facilities are outperforming office buildings in terms of rental growth – a trend which is being accelerated by the popularity of  home delivery services including Amazon that are now operating in South Africa.

Decentralized commercial property continues to perform better in Cape Town than other metros. Grade A gross rentals in the Mother City grew by 6.5% in Q1 2024 on an annualised basis.

How to measure the investment potential of a Cape Town commercial property

By now, it’s clear that the Western Cape and Cape Town in particular are experiencing different economic fortunes than the rest of the country. In this context, investor appetite for commercial property in the city and surrounding region is expected to continue its positive trend.

If you’re considering a property investment in the Mother City, you may want to take stock of several factors when assessing the viability of allocating a large chunk of capital to office or industrial space.

  • Return on investment is the key factor to consider when assessing a potential asset allocation. However, when it comes to commercial property, predicting this return requires careful consideration of two main factors: the expected occupancy rate and rental income minus expected costs.
  • Estimating the potential for appreciation in the value of the property as demand for office space in the city continues to grow in the long term is equally important.

Delving deeper into this topic, financial experts are often of the opinion that the capitalisation rate is another useful factor to consider when planning a commercial property acquisition strategy.

  • This measure takes net income and asset value into consideration and often renders a more accurate forecast of the investment’s long-term potential. The national average cap rate for commercial property is 11% according to bond provider Ooba, a number that should give investors reason for optimism even in a high interest rate environment.

Taking all these factors into consideration, we’re still of the opinion that the Western Cape offers the best income potential of any office space sector. With solid economic growth, a low vacancy rate, and demand for new commercial buildings adding significant upside potential to the medium and long-term investment outlook Cape Town office space has been the standout.

Though the barrier to entry may be higher with a commercial property investment compared with residential buildings, the potential for returns and repurposing during the lifetime of the investment makes office and industrial space an extremely solid acquisition for corporate and high net worth individual investors.

Let us work with you to secure the best Cape Town investment property

Considering the magnitude of investment required for commercial property purchases, purchasing an office or industrial space is a decision that needs to be taken after careful consideration.

The Commercial Space team has decades of experience advising investors on commercial property purchases and we would be excited to work with your business to do the same. Contact us today to view our portfolio of premium office space in the Cape Peninsula, and discuss your future investment plans.