Commercial property ‘to remain under pressure’
CAPE TOWN – THE DOWNWARD correction in the commercial property market was expected to continue next year even though the economy would fare better than it did this year, FNB Commercial Property property strategist John Loos said on Thursday.
“2021 will not be without challenges. The coronavirus is still lingering across the world, albeit creeping closer to the vaccine, and South Africa is still facing ‘old structural issues’ that hamper its economic performance,” he said in the bank's latest Property Insights publication.
Positive economic growth was likely in 2021, after 2020’s severe contraction, but was not yet likely to be strong enough to stem rising property vacancies, and downward pressure on property incomes and values.
Loos said it was important to be realistic regarding time frames for the economy to achieve “full recovery”, with the recovery defined as gross domestic product (GDP) returning to 2019 pre-Covid-19 levels.
“A portion of the country’s production capacity has shut its doors. That lost production capacity will only return with a considerable lag, as business confidence slowly improves and either new businesses are formed or existing ones expand capacity,” he said.
Forecast positive +3 percent and +0.5 percent GDP growth rates for 2021 and 2022, respectively, were only projected to take the real GDP level back to 95.2 percent of its 2019 level by 2022, he said.
Given the 2019 level of GDP was insufficient to stop a rising All Property Vacancy Rate, “our expectation is that lower GDP levels in the 2020 to 2022 period will likely speed up the pace of increase in the All Property Vacancy Rate in those years”, said Loos.
The All Property Vacancy Rate, after averaging a forecast 8 percent for this year, was expected to jump to about 11 percent next year and 13 percent in 2022.
Indicators of ongoing tenant financial pressure supported an expectation of further rise in vacancy rates.
TPN’s data on property tenants in good standing with landlords regarding rental payments showed the percentage of commercial tenants in good standing in the third quarter was 56.19 percent, well below the pre-lockdown 77.85 percent of the first quarter.
“We expect the overhang from the shock of second-quarter lockdowns on the economy to permeate the property market in 2021.”
Rode and Associates’ market rental data for the third quarter showed national decentralised A-Grade office rentals per square metre falling a for second successive quarter, by -3.23 percent year-on-year, while national prime industrial rentals per square metre recorded their first quarter of year-on-year decline to the tune of -0.64 percent.
This pressure on property income in turn led FNB to the projection of another year of average decline in commercial property values.
“We had pencilled in an average All Property value per square metre decline of -7 percent in 2020, and project a further -9 percent in 2021, thus expecting a cumulative value decline for 2020 and 2021 near to -15 percent in total,” said Loos.
Industrial property was expected to be better off than the retail and office property sectors, with the more affordable industrial property sector “being the best performer of the weak bunch”.
Retail and office property were likely to be under significantly greater pressure than industrial property.
In retail property, more affordable community shopping centres were expected to be more of a sweet spot than the larger and more costly regional and super-regional malls.
“We would guard against expecting the remote work trend to accelerate too rapidly, with many corporates still having offices and infrastructure in place for the time being. But we believe it has a bigger future in the coming years, and this raises many questions as to how people will choose to live,” said Loos.