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CAPE TOWN – After-inflation commercial property values are expected to continue falling in the second half of 2019 as more commercial properties go vacant.

This was according to FNB property sector strategist John Loos, who wrote in an outlook for the commercial property sector yesterday that the rising vacancy trend was unlikely to be halted by expectations of a mild economic upswing early in 2020, or the possibility of a repo rate cut in the near term.

Many commercial companies are struggling financially in the tough economy due to escalating vacancies and declining property values.

FirstRand forecasts a 1.2 percent rise in gross domestic product (GDP) in 2020 from 0.6 percent this year, and believes a 0.25 percent basis point interest rate cut might be imminent.

Loos said, however, they believed that GDP growth of at least 2percent would be required to halt the rising vacancy trend. 

Investec economist Annabel Bishop said markets were factoring in an interest rate cut this year, and some market participants for as early as the July 18 monetary policy meeting.

“Total commercial property fund returns are projected to remain in single digits in the process,” said Loos.

In addition, property operating costs were likely to increase further from strong municipal rates and utilities tariff increases.

Tony Bales of Epping Properties said the most successful property investors in the next 24 months, given current market conditions, were going to be focused, knowledgeable players who knew how to exploit the concept of value investing. 

He said that over the past few years, most industrial and commercial properties had shown good capital appreciation and income returns, and many investors took to purchasing any available commercial or industrial property.

However, property purchasers would need to ditch the generalist market investor approach if they want to see above market returns.

Loos said another risk to commercial property was the deteriorating government debt situation, which increased the risk of rising bond yields, and with them property capitalisation rates, which would exert downward pressure on property values.

The two most up-to-date monthly data releases for the second quarter: June new passenger vehicle sales and the Manufacturing New Sales Index within the Absa Purchasing Managers Index, indicated that the first quarter contraction was likely to continue.

The commercial property vacancy rate had increased from a multi-year low of 5.2 percent in 2014 to 6.9 percent in 2018. 

Loos said above inflation increases in municipal rates and tariff costs, most notably for Eskom, were likely to continue, given the weak state of parastatal and general government finances. 

Municipal rates, tariffs and charges, as a percentage of commercial property company operating costs, were at 63.9percent in the first half of 2018, from 41percent in 2000.

On the residential property market front, FNB Economist Siphamandla Mkhwanazi said the House Price Index trended up in June, recording 3.5percent year-on-year (y/y) growth. Mortgage advances grew faster in May, recording 4.2 percent percent y/y up from 4.0 percent y/y in the previous month, the highest increase since July 2016.

Absa economic Jacques du Toit said based on current trends in the short-term outlook, household finances and consumer confidence and growth in household credit balances, including mortgage balances, was, for the rest of 2019, expected to remain at levels seen in the first few months of the year.

However, Du Toit said an expected cut of 25 basis points in lending rates at the next Monetary Policy Committee meeting this month would underpin the residential property market and the demand for and growth in mortgage finance.