South Africa Real Estate Report Q1 2013

BMI's Q113 South Africa Real Estate report examines the commercial office, retail, industrial andconstruction segments throughout the country in the context of an industry in the midst of a protractedconstruction lull, following years of double-digit growth.

With a focus on the principal cities of Johannesburg, Cape Town and Durban, the report covers the rentalmarket performance in terms of rates and yields over the past 18 months and examines how best tomaximise returns in the commercial real estate market, while minimising investment risk and exploringthe impact of the government-led infrastructure initiative on a market characterised by a tepidconstruction pipeline. With the construction sector still in a period of stagnant growth, we see fewopportunities to lift the industry out of the quagmire. For real estate firms with a higher dependence onthe construction side, the risks are greater than for those with a portfolio of leasable space, as theslowdown in the project pipeline will go some way to rectifying the imbalanced supply and demanddynamics.

As such, the negative supply side outlook for the sector is starting to have a tangible effect upon the realestate rental market, with our newly collected data covering market performance for the first six monthsof 2012 doing little to inspire confidence.

Key Points

We hold to our view for South Africa to see tepid growth over the medium term, forecasting thatreal GDP will expand by 2.7% in 2012 and 3.3% in 2013, with risks weighted to the downside.Although private consumption should hold up relatively well, serious headwinds from the globaleconomy will inevitably take their toll on growth.

On August 16, 34 striking miners were shot dead by police in the so-called 'Marikana Massacre'at a platinum mine owned by Lonmin. The incident has sparked further unrest in the miningsector and exposed deeply-ingrained political issues, prompting investors to re-think SouthAfrica's risk profile.

We continue to see sluggish growth within the wider South African construction sector despitePresident Zuma's concentrated effort on infrastructure investment in 2012. Though growthpicked up marginally over the first quarters - indicating that the slump has finally reached abottom - there are still many bottlenecks, both political and financial, preventing a strong returnto former glories. Hence, on the back of a tentative domestic pipeline we believe South Africa'sconstruction industry will continue to face limited growth at home, and therefore maintain ourconstruction industry real growth forecast of 2.5% for 2012.