The link between the petrol price and real estate in South Africa


Motorists filling up on petrol on Wednesday (Aug. 3) have seen a welcome discount on their bill, after record highs in previous months.

Falling prices for Brent crude oil have reduced both petrols by R1.32, diesel 0.05% sulfur will cost 88 cents less, while the price of diesel 0.005% sulfur will fall by 91 cents. Wholesale clarifying paraffin costs R1.44 less, while the retail price drops by at least R1.92.

The fall in prices will ease pressure on household finances and ease inflation, which in May passed the upper bound of the central bank’s 3%-6% target for the first time in five years. Fuel has a nearly 5% weight in South Africa’s consumer price basket, according to Bloomberg.

Petrol retail costs are up 30% since the start of the year, prompting opposition parties and unions to increasingly call on the government to deregulate the price. However, the Fuel Retailers Association has warned that such a move could make it even more expensive for consumers, it said.

John Loos, strategist for the real estate sector at FNB Commercial Property Finance, warned that the fuel price cut is not yet expected to be enough to halt an expected weakening in commercial real estate demand in the second half of 2022, as the direct and indirect effects of previous increases in fuel prices carry over.

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“Firstly, this is because there are still ‘second round’ inflationary effects resulting from the previous extreme fuel price increases until early July. Second, there are also other sources of troublesome inflationary pressures at the moment, notably from a rise in food prices,” he said.

The FNB economics team expects CPI inflation to peak at around 8% by the end of 2022.

Loos said high fuel and food inflation has led to a rise in inflation expectations and, together with expected second-round effects, has increased the risk of structurally higher inflation. “In line with this, interest rates have risen and FNB currently expects a further rate hike of 100 basis points to where the prime rate will reach 10% by 2023,” he said.

The strategist said that even after the slight drop in the fuel price, the price level will remain exorbitant at a Gauteng pump price of R24.99, which along with rising headline inflation and interest rates is putting significant financial pressure on both consumers and businesses.

“Therefore, with regard to retail real estate, we still expect consumer spending to be re-prioritised to pay high gas bills and higher interest billsand that this remains negative for retailers and shopping centers that focus more on non-essential and low-frequency ‘delayable’ items.

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“Many of these centers may be the larger regional size categories, while the smaller neighborhood and convenience centers may be less affected.”

Retail data from StatsSA showed fuel sales grew a very strong 26.6% in May 2022, and was likely even stronger in June/July given further fuel price inflation, FNB said.

This must have taken a noticeable bite out of consumers’ wallets and away from malls.

“Certain low-frequency deferred spending categories also indicated support for our view of spending reprioritisation in May,” Loos said. ‘

Hardware, Paint and Glass Product Retail’, which relates to home maintenance and improvements and is often deferred, fell 6.8% year-over-year in real terms, while ‘Clothing Textiles and Footwear’ fell 4%, and ‘Home Furniture and Appliances’ were down 0.3%.

By comparison, the more stable and essential ‘General Dealers’ category, which largely houses food and grocery shopping, continued to grow by 3.7%.

“The pressure from the past global oil and fuel price rise in real estate markets via the global and domestic economic impact is also likely not fully implemented, and July’s Manufacturing Purchasing Managers’ Index did indeed point to a negative impact likely in part. is because of the earlier rise in the oil price,” said Loos.

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A negative impact on the country’s trade could negatively impact demand for Industrial Property Space, FNB said.

The effect of both the recently rising interest rates and further expected interest rates, in response to the rise in inflation, together with additional economic pressures, all partly influenced by global oil and fuel price increases, are therefore still expected to lead to slowing down real estate sales in all major commercial real estate sectors in the current half of 2022, despite the latest fuel price drop.

“In addition, upward pressure on real estate capitalization rates and downward pressure on the fair value of commercial real estate is still expected in the second half of 2022,” said Loos.

on the residential side, The slower development of new homes is also expected to continue in the second half of 2022but the housing rental market is expected to continue its mild strengthening, supported by some aspiring home buyers who are delaying their purchases and rents in anticipation of the rate hike cycle, the real estate strategist said.

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