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Office and retail property sales activity levels weaken due to rising interest rates

WHILE office and retail saw declines in perceived market sales activity, the industrial property market’s activity rating rose further. Photo, David Ritchie.

WHILE office and retail saw declines in perceived market sales activity, the industrial property market’s activity rating rose further. Photo, David Ritchie.

Published 14h ago

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Office and retail commercial property sales showed signs of weakening in the second quarter, likely due to the impact of rising interest rates, according to FNB’s Commercial Property Broker Survey released yesterday.

While office and retail saw declines in perceived market sales activity, the industrial property market’s activity rating rose further.

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The percentage of broker respondents perceiving business conditions to be satisfactory also fell slightly from 47 percent in the prior quarter to 46 percent, following a prior rising trend, and remaining at a mediocre level.

“This reflects an economy battling to fully recover from the very deep recession of 2020, and more recently pressured by rising interest rates,” FNB Commercial Property commercial strategist John Loos said in a statement.

When brokers were asked for their ratings of market activity levels on a scale of 1 to 10, the respondents were still most upbeat about the industrial and warehouse market.

The Industrial Property Market’s Activity Rating rose to 6.35 from 6.2 in the prior quarter.

The retail property activity rating declined to 4.60 from 4.87 over the same two quarters.

The office property market activity rating remained the weakest of the three, also declining to 3.72 from 4.26.

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Prior to the 2nd quarter survey, sales activity ratings had been on a rising trend in all 3 property classes following the easing of Covid-19 lockdowns.

“We believe this ‘normalisation’ from a Covid-19 point of view may have had a positive impact on the economy as well as property markets. But global supply chain disruptions have been contributing to building global inflationary pressures, and more recently war in the Ukraine, and resultant sanctions and boycotts on Russia, have further exacerbated the problem,” said Loos.

The result was 125 basis points’ worth of interest rate hikes by the SA Reserve Bank since late-2021, while a further 100 basis points’ worth of hikes were expected this year, he said.

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A sample of commercial property brokers in the major metros, Joburg and Ekurhuleni, Tshwane, Ethekwini, Cape Town and Nelson Mandela Bay were respondents to the survey.

The decline in perceptions around market activity was not yet significant, but after earlier quarters of “very significant increase” in this percentage, it suggested that broker confidence improvements had run out of steam - this level also still implied that 54 percent of respondents were dissatisfied with conditions.

The RMB-BER Business Confidence Index for the second quarter showed a similar 42 percent of respondents expressing satisfaction with business conditions, and this was a weakening from the prior quarter’s 46 reading.

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The industrial property market sales activity rating recorded its highest reading since the survey started in 2019.

“While this property class is not seeing strong economic performance in the related manufacturing sector, we believe it is benefiting from being the most affordable and adaptable property class in tough financial times, as well as from an increasing need for logistics and warehousing due to greater levels of online retail emerging,” said Loos.

The retail and office activity ratings, by comparison, had still not yet achieved a rating higher than their pre-Covid 19 lockdown readings for the first quarter of 2020.

“Retail is still constrained by a financially pressured consumer, while the office market sees challenges from weak levels of services sector employment as well as greater levels of remote work compared with the pre-lockdown era,” he said.

“We believe the interest rate hiking that started late last year has likely been a key influence in starting to “dampen the market spirits,” and some decline in the sales activity ratings across all three property classes were expected in the second half of 2022,” he said.

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