As seen within the South African market, the choice of asset classes is limited to the traditional four: office, retail, industrial and residential. These asset classes may perform well in the long term but are expected to churn out short term returns consistently. This creates a mismatch of expected return and performance. The reason why the expected returns are not met is that investors do not anticipate the cyclical nature of the economy. Often, when the asset class under performs, investors dump the asset, taking an immediate loss as opposed to riding out the property cycle and waiting for such asset to perform.
The defining feature for the property sector is that capital behaves very differently in South Africa, when compared to the rest of the world. Two components influence this difference. Firstly, the rand, unlike the dollar, Euro or British pound is very liquid. There is also a much higher portion of pension funds, relative to GDP, under management. This is evidenced by South Africa having some of the largest pension funds in the world, with the Government Employees Pension Fund being around the eighth largest globally.
Prior to the global pandemic which has, and will have, severe economic consequences, the property industry was taking strain. The Urban Real Estate Research Unit, based at the University of Cape Town, had concluded that the vacancy costs for a landlord had increased from 6 months of lost income to 18 months by the beginning of January 2020. This, together with rising operating costs and increased rates and taxes, has meant that landlords need to find more efficient ways of filling their vacancies, together with reducing the cost in doing so. Fears are mounting that the impact of Covid-19 could potentially result in thousands of job losses with businesses closing and vacancy rates spiking sharply. However, these changes are cyclical and structural and as some businesses close, other new industries are created. It is anticipated that the Covid-19 pandemic may just have accelerated the disruptor effect and that certain technology changes and shifts in behavioural patterns may occur sooner. This may well be the case for remote learning, online shopping etc., but it will still be important for humans to socialise, party, attend shows and other recreational activities.