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RESEARCH Cap & Discount Rate Report
MAY 2020
CAP & DISCOUNT RATE REPORT
Key Research Findings
The SAPOA Cap & Discount Rate Survey for the six months ended May 2020 shows that the
All Property cap rate shifted out 10bps over the past 6 months and 20bps over the past 12
months, while the discount rate weakened by the same amount since assumed future market
rental growth remained stable.
As a result of various exogenous factors, the yield on instruments like the R186 has been volatile.
Despite the volatile nature of the bond yield during the past few years, the continued narrow
spread relative to cap and discount rates have raised questions around asset pricing generally.
While landlords remain wary of a further deterioration in local bond yields and its impact on capital
growth, a declining interest rate might provide support to the downside.
The unattractive yield on international bonds is currently a key balancing factor for South African
bond yields. Previous research by MSCI suggests that long-dated bond and property yields donÕt
always rise in parallel Ð especially in the presence of accelerating rental growth.
The extent to which the economic fallout caused by the Covid-19 pandemic negatively affects
vacancy ratesÊ and rental growth may see increased pressure on property yields and its pricing
relative to bonds given a renewed focus on propertyÕs risk premia.
While the overall discount rate ticked up by 10bps in the six months to May, an analysis of the
underlying property types suggests a mixed picture.
The largest improvement was seen in the smaller format retail centres which has been outperforming
larger centres, both from a returns and trading density point of view. Traditionally, perceived as
a higher risk investment, convenience retail might be a beneficiary of the post Covid retail
landscape as consumers change their shopping habits amid a structural shift in tenant mix across
retail segments.
The largest increase in discount rate was reported for low quality offices. In the wake of Covid-
19 this segment of the market may be particularly hard hit given increased Work From Home
and heightened economic pressure on SMMEÕs.
During the six months ended May 2020, valuers held their assumption on future market rental
growth at around 4.9% while their expectation of property expenditure growth softened by around
30bps
As at May 2020, property expenditure was assumed to grow at a perpetual 7.1% per annum over
the course of a five year cashflow period while future market rental growth was assumed at 4.9%
year-on-year.
On a segment level, the largest decline in assumed market rental growth was seen in the Cape
Town CBD Office market and non-CBD secondary quality offices where increasing vacancies
and the heightened uncertainty as a result of the Covid-19 pandemic might be weighing on
valuerÕs minds.
Overall, future property expenditure growth has come down with the highest decreases coming
in the smaller format retail segments where the impact of administered price increases may be
lower than expected given NERSAÕs approved tariff increase of 6.9% for municipalities.
T: (011) 883 0679 F: (011) 883 0684
Email: marketingmanager@sapoa.org.za 02
Web: www.sapoa.org.za
MAY 2020
CAP & DISCOUNT RATE REPORT
Cap & discount rates slowly starting trend up?
The SAPOA Cap & Discount Rate
Survey for the six months ended
May 2020 shows that the All
Property cap rate shifted out 10bps
over the past 6 months and 20bps
over the past 12 months, while the
discount rate weakened by the
same amount since assumed future
market rental growth remained
stable.
As a result of various exogenous
factors, the yield on instruments
like the R186 has been volatile.
Despite the volatile nature of the
bond yield during the past few
years, the continued narrow spread
relative to cap and discount rates
have raised questions around asset
pricing generally.
While landlords remain wary of a
further deterioration in local bond
yields and its impact on capital
growth, a declining interest rate
might provide support to the
downside.
The unattractive yield on international bonds is currently a key balancing factor for South African bond
yields. Previous research by MSCI suggests that long-dated bond and property yields donÕt always rise in
parallel Ð especially in the presence of accelerating rental growth.
The extent to which the economic fallout caused by the Covid-19 pandemic negatively affects vacancy
ratesÊ and rental growth may see increased pressure on property yields and its pricing relative to bonds
given a renewed focus on propertyÕs risk premia.
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Email: marketingmanager@sapoa.org.za 03
Web: www.sapoa.org.za
MAY 2020
CAP & DISCOUNT RATE REPORT
Discount rates weakened most across Retail segments
While the overall discount rate ticked
up by 10bps in the six months to May,
an analysis of the underlying property
types suggests a mixed picture. During
the six month period, many property
segments reported softening discount
rates while only a couple of segments
reported meaningful strengthening
(Figure 2).
The largest improvement was seen in
the smaller format retail centres which
has been outperforming larger centres,
both from a returns and trading density
point of view.
Traditionally, perceived as a higher risk
investment, convenience retail might be
a beneficiary of the post Covid retail
landscape as consumers change their
shopping habits amid a structural shift
in tenant mix across retail segments.
Early indications from MSCIÕs Retail
benchmarking data is that the
entertainment and food service
categories may be among those hardest
hit in the short term and vulnerable to
structural shifts in consumer behaviour
as the retail sector comes to grips with
a combination of social distancing and
constrained retail spend.
The largest increase in discount rate was reported for the tertiary office segment (in other words low quality
offices). In the wake of Covid-19 this segment of the market may be particularly hard hit given increased
Work From Home and heightened economic pressure on SMMEÕs.
Super Regional centres also saw its discount rate increase by 30bps over the six months to May 2020 as
valuers digest the impact of Covid-19 and what it might mean for larger retail centres in the short to medium
term.
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MAY 2020
CAP & DISCOUNT RATE REPORT
Assumed rental growth stable, expenditure growth down
During the six months ended May
2020, valuers held their assumption
on future market rental growth at
around 4.9% while their expectation
of property expenditure growth
softened by around 30bps.
As at May 2020, property expenditure
was assumed to grow at a perpetual
7.1% per annum over the course of a
five year cashflow period while future
market rental growth was assumed at
4.9% year-on-year. (Figure 3)
On a segment level, the largest decline
in assumed market rental growth was
seen in the Cape Town CBD Office
market and non-CBD secondary
quality offices where increasing
vacancies and the heightened
uncertainty as a result of the Covid-
19 pandemic might be weighing on
valuerÕs minds (Fig 4).
In the 6 months to November 2019,
the Cape Town CBD office segment
saw its assumed market rental growth
figure increase. Indications are that
this has now been reversed with a
20bp discount rate increase further
evidence of increased perceived future
income risk.
Overall, future property expenditure growth has come down with the highest decreases coming in the smaller
format retail segments where the impact of administered price increases may be lower than expected given
NERSAÕs approved tariff increase of 6.9% for municipalities.
T: (011) 883 0679 F: (011) 883 0684
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MAY 2020
CAP & DISCOUNT RATE REPORT
Most segments see lower expected future cost growth
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MAY 2020
CAP & DISCOUNT RATE REPORT
Market Discount Rate
Property Type MIN MAX MED AVE
Super Regional Shopping Centre >100,000m2 11.50% 13.52% 13.25% 12.81%
Regional Shopping Centre: 50-100,000m2 12.50% 14.00% 13.00% 13.13%
Small Regional Centre: 25-50,000m2 12.75% 14.25% 13.50% 13.41%
Retail
Community Shopping Centre: 12-25,000m2 12.00% 15.13% 14.00% 13.84%
Neighbourhood Shopping Centre: 5-12,000m2 13.50% 15.75% 14.50% 14.40%
Retail Warehouse 13.25% 15.50% 14.00% 14.32%
Stand-alone Retail unit 14.00% 15.75% 14.50% 14.67%
CBD Johannesburg Office 15.00% 17.50% 15.75% 15.75%
CBD Pretoria Office 15.00% 16.75% 15.25% 15.50%
CBD Cape Town Office 13.50% 15.25% 14.25% 14.32%
Office
CBD Durban Office 15.00% 17.25% 16.00% 15.90%
Non CBD Prime Office 12.75% 15.50% 14.00% 14.06%
Non CBD Secondary Office 14.00% 16.50% 15.00% 14.92%
Non CBD Tertiary Office 15.00% 17.25% 15.50% 15.69%
High - Tech Industrial 13.00% 16.00% 14.88% 14.59%
Industrial
Light Manufacturing 13.50% 16.50% 15.00% 15.10%
Warehousing 13.75% 16.25% 15.00% 14.95%
Standard Units 13.25% 17.00% 15.00% 15.27%
Other 14.00% 17.50% 15.00% 15.42%
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CAP & DISCOUNT RATE REPORT
Market Cap Rate
Property Type MIN MAX MED AVE
Super Regional Shopping Centre >100,000m2 6.50% 8.00% 7.25% 7.25%
Regional Shopping Centre: 50-100,000m2 7.19% 12.50% 7.63% 7.93%
Small Regional Centre: 25-50,000m2 7.50% 11.00% 8.00% 8.17%
Retail
Community Shopping Centre: 12-25,000m2 7.00% 11.00% 8.25% 8.46%
Neighbourhood Shopping Centre: 5-12,000m2 7.50% 11.00% 9.06% 9.07%
Retail Warehouse 8.00% 12.00% 9.50% 9.56%
Stand-alone Retail unit 8.25% 12.00% 10.00% 9.83%
CBD Johannesburg Office 10.00% 12.00% 11.50% 11.31%
CBD Pretoria Office 9.75% 11.00% 10.75% 10.59%
CBD Cape Town Office 8.50% 9.50% 9.00% 8.89%
Office
CBD Durban Office 10.00% 11.50% 10.75% 10.75%
Non CBD Prime Office 7.50% 11.00% 9.00% 9.19%
Non CBD Secondary Office 9.00% 11.00% 10.00% 10.07%
Non CBD Tertiary Office 9.75% 11.50% 11.00% 10.78%
High - Tech Industrial 8.00% 11.00% 10.00% 9.75%
Industrial
Light Manufacturing 8.50% 11.75% 10.22% 10.20%
Warehousing 8.59% 13.00% 10.00% 10.06%
Standard Units 9.00% 14.00% 10.00% 10.35%
Other 9.00% 12.00% 11.63% 11.04%
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CAP & DISCOUNT RATE REPORT
Market Rental Growth
Property Type MIN MAX MED AVE
Super Regional Shopping Centre >100,000m2 4.50% 6.00% 5.00% 5.25%
Regional Shopping Centre: 50-100,000m2 4.50% 6.50% 5.00% 5.32%
Small Regional Centre: 25-50,000m2 4.50% 6.00% 5.00% 5.17%
Retail
Community Shopping Centre: 12-25,000m2 4.25% 7.00% 5.00% 5.37%
Neighbourhood Shopping Centre: 5-12,000m2 4.00% 6.00% 5.00% 5.19%
Retail Warehouse 3.00% 7.00% 5.00% 5.04%
Stand-alone Retail unit 3.00% 8.00% 5.00% 5.17%
CBD Johannesburg Office 3.00% 5.75% 5.00% 4.61%
CBD Pretoria Office 3.00% 6.50% 5.00% 4.93%
CBD Cape Town Office 5.00% 6.00% 5.00% 5.33%
Office
CBD Durban Office 4.50% 5.75% 5.25% 5.25%
Non CBD Prime Office 3.00% 6.25% 4.75% 4.53%
Non CBD Secondary Office 3.00% 5.75% 4.13% 4.32%
Non CBD Tertiary Office 2.00% 5.75% 5.00% 4.48%
High - Tech Industrial 3.00% 6.00% 5.00% 4.66%
Industrial
Light Manufacturing 3.00% 6.00% 5.00% 4.63%
Warehousing 3.00% 6.00% 5.00% 4.62%
Standard Units 3.00% 6.00% 4.50% 4.48%
Other 3.00% 6.00% 5.00% 4.52%
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CAP & DISCOUNT RATE REPORT
Property Expenditure Growth
Property Type MIN MAX MED AVE
Super Regional Shopping Centre >100,000m2 6.00% 8.00% 7.00% 7.22%
Regional Shopping Centre: 50-100,000m2 6.00% 8.00% 7.40% 7.43%
Small Regional Centre: 25-50,000m2 6.00% 8.00% 7.00% 7.21%
Retail
Community Shopping Centre: 12-25,000m2 6.00% 8.00% 7.38% 7.28%
Neighbourhood Shopping Centre: 5-12,000m2 6.00% 8.00% 7.00% 7.10%
Retail Warehouse 6.00% 8.00% 7.13% 7.13%
Stand-alone Retail unit 6.00% 8.00% 7.00% 7.19%
CBD Johannesburg Office 6.00% 8.00% 7.00% 7.03%
CBD Pretoria Office 6.00% 8.00% 7.30% 7.22%
CBD Cape Town Office 6.00% 7.60% 6.75% 6.77%
Office
CBD Durban Office 6.00% 7.35% 7.00% 6.80%
Non CBD Prime Office 6.00% 8.00% 7.00% 7.09%
Non CBD Secondary Office 6.00% 8.00% 7.00% 7.13%
Non CBD Tertiary Office 6.00% 7.35% 7.00% 6.80%
High - Tech Industrial 6.00% 8.00% 7.00% 7.20%
Industrial
Light Manufacturing 6.00% 8.00% 7.25% 7.16%
Warehousing 6.00% 8.00% 7.00% 7.01%
Standard Units 6.00% 8.00% 7.00% 7.03%
Other 6.00% 8.00% 7.25% 7.26%
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CAP & DISCOUNT RATE REPORT
Exit Cap Rate
Property Type MIN MAX MED AVE
Super Regional Shopping Centre >100,000m2 7.00% 8.50% 7.75% 7.65%
Regional Shopping Centre: 50-100,000m2 7.50% 13.00% 8.25% 8.41%
Small Regional Centre: 25-50,000m2 7.75% 11.50% 8.50% 8.62%
Retail
Community Shopping Centre: 12-25,000m2 7.50% 11.50% 8.50% 8.94%
Neighbourhood Shopping Centre: 5-12,000m2 8.00% 11.50% 9.19% 9.47%
Retail Warehouse 7.25% 12.50% 10.50% 10.16%
Stand-alone Retail unit 8.50% 12.50% 10.50% 10.45%
CBD Johannesburg Office 10.50% 12.50% 12.00% 11.89%
CBD Pretoria Office 10.25% 11.75% 11.50% 11.19%
CBD Cape Town Office 9.00% 10.25% 9.50% 9.50%
Office
CBD Durban Office 10.00% 12.25% 10.75% 11.08%
Non CBD Prime Office 8.00% 11.50% 10.00% 9.62%
Non CBD Secondary Office 9.50% 11.75% 11.00% 10.67%
Non CBD Tertiary Office 10.25% 12.50% 11.25% 11.38%
High - Tech Industrial 8.50% 12.00% 10.50% 10.32%
Industrial
Light Manufacturing 9.00% 12.25% 10.97% 10.78%
Warehousing 9.09% 13.50% 10.25% 10.65%
Standard Units 9.50% 14.50% 10.75% 10.98%
Other 9.50% 13.00% 12.75% 12.14%
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CAP & DISCOUNT RATE REPORT
Number of Transactions
Property Type TOTAL
Super Regional Shopping Centre >100,000m2 1
Regional Shopping Centre: 50-100,000m2 2
Small Regional Centre: 25-50,000m2 3
Retail
Community Shopping Centre: 12-25,000m2 1
Neighbourhood Shopping Centre: 5-12,000m2 4
Retail Warehouse 3
Stand-alone Retail unit 2
CBD Johannesburg Office 1
CBD Pretoria Office
CBD Cape Town Office 4
Office
CBD Durban Office
Non CBD Prime Office 25
Non CBD Secondary Office 11
Non CBD Tertiary Office 2
High - Tech Industrial 1
Industrial
Light Manufacturing 1
Warehousing 14
Standard Units 17
Other 1
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CAP & DISCOUNT RATE REPORT
ABOUT MSCI
For more than 40 years, MSCIÕs research-based indexes and analytics have helped the
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Clients rely on our offerings for deeper insights into the drivers of performance and risk
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benchmarks and ESG research.Ê
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recent P&I ranking.
For more information, visit us at www.msci.com
Report compiled by:
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CAP & DISCOUNT RATE REPORT
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CAP & DISCOUNT RATE REPORT
NOTICE AND DISCLAIMER...continued
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Web: www.sapoa.org.zaSAPOA - South African Property Owners Association T: (011) 883 0679 - F: (011) 883 0684 Email: marketingmanager@sapoa.org.za Web: www.sapoa.org.za Physical: Paddock View, Hunt's End Office Park, 36 Wierda Road West, Wierda Valley, Sandton Postal: P O Box 78544, Sandton 2146 Report compiled by:
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