This study investigates the role of macro-economic indicators in explaining direct real estate returns in South Africa (SA). Literature review is conducted to identify factors that drive direct commercial real returns and the identified drivers are tested in an emerging market. The study applies SA annual commercial real estate returns including total returns, rental growth and capital growth published by the Investment Property Databank (IPD) over the past 20 years, from 1995 to 2014, as an independent variable. The most dominant and significant factors that explain total returns across all property types and provinces in South Africa are GDP, unemployment rates and interest rates which are macro-economic indicators. Our study finds key differences between the determinants of total return and change in capital values which are different from the variables which determine rental growth- the results also highlight the heterogeneity and complexity of real estate returns.

These results are important for asset managers as well as government regulatory agencies to make better informed decisions in relation to factors which affect direct real estate returns in an emerging economy.