At a time when many economies had begun to anticipate a more benign interest-rate environment, the resurgence of geopolitical tensions has rekindled concerns about inflation.
According to Emeritus Professor François Viruly, a property economist and chief economist at Datazone, South Africa faces a primary risk that extends beyond the immediate consequences of rising energy and transport expenses.
He notes that the potential impact of heightened inflation expectations on monetary policy and long-term borrowing costs remains a significant concern for the country.
He says listed property securities compete directly with government bonds for investor capital, making movements in bond yields a critical determinant of sector valuations.
“As bond yields rise, investors generally require higher property yields, placing pressure on capital values. Conversely, a stable inflation outlook and lower bond yields provide a more supportive backdrop for property markets.
“In this regard, the trajectory of inflation expectations may prove as important to the sector’s outlook as the inflation rate itself.”
Inflation could rise by up to 1 percentage point above the baseline forecast
According to Datazone by Quoin Technologies, the South African Reserve Bank’s latest Monetary Policy Committee (MPC) statement highlighted potential inflationary concerns.
The new market intelligence and reporting platform was established to address a long-standing gap in the property sector, says the bank. While inflation remains broadly contained, it cautioned that an escalation of current conflicts could push consumer prices materially higher.
“In its adverse scenario, inflation could rise by up to 1 percentage point above the baseline forecast. Against this backdrop, the recent 25-basis-point increase in the repo rate underscores the Bank’s determination to preserve its inflation-fighting credibility and prevent expectations from becoming unanchored.”
Inflationary pressures are most visible in operating costs
For the property sector, Viruly says inflationary pressures are most visible in operating costs. He says that although property owners have demonstrated resilience in managing expenses, administered prices continue to rise at rates well above headline inflation.
“Electricity tariffs, municipal charges, water costs, rates and taxes have become increasingly significant drivers of expenditure, placing pressure on both landlords and tenants.”
The chief economist says that in 2025, increases in several administered prices exceeded 10%, continuing to pressure net operating costs across the property sector.
While some of these increases can be recovered through lease structures, persistently elevated cost escalation remains a challenge for property owners and managers seeking to protect income streams and maintain asset performance, he says.
According to Viruly, recent data from Statistics South Africa suggests that these pressures remain elevated.
The annual increase in the Producer Price Index (PPI) for electricity and water measured 12.5% in April 2026, moderating from 17.9% in March. Yet the index rose by 1.5% month-on-month, indicating that utility inflation remains firmly embedded in the economy’s cost structure, he says.
Broader concern for property investors
He says the broader concern for property investors lies in the relationship between inflation expectations and long-term interest rates.
“Expectations of higher inflation typically translate into higher government bond yields as investors demand greater compensation for future inflation risk. This raises the cost of capital and places downward pressure on asset valuations.”
Meanwhile, Stefano Scarpetta, the chief economist and head of the economics department at the OECD, says the global economy entered 2026 in a stronger position than many had anticipated, supported by robust investment in artificial intelligence, favourable financial conditions, and easing trade tensions.
The global economy is once again facing headwinds
Yet the global economy is once again facing headwinds, as the evolving conflict in the Middle East tests its resilience, he says.
Sharing their latest OECD Economic Outlook, which examines how the Middle East conflict is reshaping global economic prospects, he says disruptions in the Strait of Hormuz and damage to energy infrastructure have:
- Driven up energy prices.
- Raised fertiliser and food costs, increasing concerns around food security.
- Added to inflationary pressures, weighing on households’ incomes and business and consumer confidence.
With uncertainty remaining high, they present two economic outlook scenarios:
- •A time-limited disruption with gradual easing as of mid-2026, with downward revisions to global economic growth.
- A prolonged disruption, leading to significantly weaker growth, more persistent inflation and broader spillovers across regions.
The economic outlook also highlights key policy challenges, which include containing inflation, targeting support to protect vulnerable households and firms while ensuring public finance sustainability, safeguarding food security and strengthening the resilience of energy systems and supply chains.
“Rising defence spending is also adding pressure on public finances in an increasingly uncertain geopolitical environment. The risks and trade-offs become more acute the longer the disruption persists.”
According to Scarpetta, AI represents a possible upside to this outlook. He says strong investment and rapid technological progress could support productivity and lift growth across many economies.
“At the same time, these gains are not assured. High energy requirements, infrastructure constraints and financial market risks could slow deployment or limit the expected benefits.”
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