Interest rate cuts could spark renewed real estate investment interest

Cape Town - South Africa’s real estate market was hard-hit by the succession of interest rate hikes which took place from 2021 to 2023. However, several market indicators point to the possibility that this picture may be changing, with some experts having high hopes for an upswing in property investments. With many South Africans relooking at the real estate sector for potential investment, it’s time for a reminder about the role of insurance in safeguarding these high-value assets.

Commenting on this is Lindiwe Matlou, Head of Santam Real Estate, who says that with business volumes and confidence stabilising, it’s important for property buyers to revisit their insurance strategies in protecting their investments. “As property values rise and market activity increases, protecting your assets against the potential risks is essential.

Whether it's safeguarding against property damage, liability risks, or loss of rental income, having the right insurance strategy in place is critical in today’s dynamic real estate market,” Matlou says.

Real estate market overview

The impact of the pandemic and lockdown regulations had a significant impact on the local real estate industry. By the end of lockdown, property prices were at an all-time low, giving many South Africans an unmatched opportunity to become home- and commercial property owners.

As the economy began its gradual and staggered recovery however, the South African Reserve Bank announced a series of 10 consecutive interest rate hikes in a bid to combat inflation. Currently, the prime lending rate sits at 11.75%, based on a repo rate of 8.25% – the highest level in 14 years. This interest rate is however still lower than the average of between 13% – 15.5%.

For many prospective real estate investors, now is an ideal time to cash in on the relatively low property prices before interest rates rise again. To this point, the Bureau for Economic Research found that Business confidence in the Other Services sector rose to 55 in quarter 2 of 2024, with over half of respondents feeling confident about the current economic conditions. The most noticeable increase was seen in the real estate market, with confidence returning to a level close to the running average.

Protecting against property damage

Touching on the types of insurance cover that are most relevant to property owners right now, Matlou says that first and foremost, it’s important to have enough cover against the increasing risk of natural disasters. Investors need to ensure they have comprehensive property insurance in place to cover damages caused by events such as fires, floods, or storms.

This is particularly essential in light of the impact of climate change and the fact that natural disasters are set to increase in the medium- to long-term. For example, high-velocity winds could cause extensive damage and destruction to roofing structures. If left unchecked, this could lead to future damage caused by water, which could in turn have major implications for flooring, walls and other structural elements of the property.

In addition to water damage, mould and mildew could develop, further compromising the integrity of the building and leading to costly repairs. The cumulative effects of these climate-related events can drastically reduce the value of a property and increase maintenance costs over time. Having insurance cover in place will serve as a financial safety net, giving property owners access to the funds needed to make quick repairs and replacements when necessary.

What about third-party liabilities?

Another factor to consider is liability cover, which is specifically important in the case of commercial property. If someone is injured on your property, the cost of the legal battle and settlements can add up quickly. To protect themselves against these kinds of third-party injury claims, property owners can take out liability cover. As an example, Santam’s insurance policies for business premises currently include public liability cover up to R100 million.

This provides coverage against claims that arise from accidents or injuries on your premises. In the unfortunate event of a claim, property owners who are adequately insured, won’t need to cover the related costs out of pocket and can use their claim payout to cover expenses such as defense costs (in the event of a lawsuit), medical expenses, property damage, and other forms of compensation to the injured party,” says Matlou.

Safeguarding against lost rental income

One of the biggest reasons why business property investors decide to purchase real estate is for the purpose of earning rental income. This passive income stream can provide steady cashflow, helping investors cover mortgage payments, maintenance costs, and other expenses while building equity in the property. Additionally, rental income can serve as a long-term investment strategy, providing financial security and the potential for capital appreciation as property values increase over time.

However, relying on rental income also comes with risks. In the event of a fire, for example, the premises can be rendered uninhabitable and while repairs and replacements take place, the property owner could temporarily lose the associated rental income. This in turn, poses a serious risk to what would otherwise be a stable income stream.

For this reason, many investors who own commercial properties opt to take out some form of rental income protection as part of their building insurance, thus ensuring that they are as prepared for the unexpected as possible.

As Matlou concludes: “a good property insurer will be able to provide custom insurance solutions based on the specific needs of real estate investors. From multi-property portfolios to single-unit investments, policies should account for unique risks and varying property values.”