What will the commercial property industry look like in a post-Covid-19 world
DURBAN - The Covid-19 pandemic and subsequent national lockdown has had a significant impact on South Africa’s commercial property industry.
Building vacancies and rental arrears have increased substantially, gross rental rates have taken a dive and some properties are being devalued by as much as 35 percent. This devaluation, however, won’t last forever.
Before the Covid-19 crisis hit, local property values were still growing by about 5-6 percent annually, with rental escalations ranging from 5-8 percent, depending on the lease and tenant.
Despite the growth in gross rentals having slowed in recent years as new developments created excess capacity and economic conditions worsened, average returns were still between 7 percent and 11 percent, depending on the profile property and sector. This growth, however, came to a sudden halt in March when the national lockdown came into effect.
Even though the economic downturn has been widespread across the country, certain sectors have been affected more than others. The worst of these have been the transport, manufacturing, retail trade and tourism. The demand for corporate office space has also declined significantly, as some businesses explore work-from-home solutions on a long-term basis, following the mandatory ‘trial period’ over lockdown.
However, as lockdown regulations continue to ease, increasingly more businesses are resuming operations and, with this, returning to their commercial spaces. We’re already seeing that up to 80 percent of tenants are back, however their turnovers are still down and liquidity is a problem which may take a while to stabilise.
But they will stabilise. Markets always recover and the commercial property industry will be no exception, making it a worthwhile investment in the long-term as the economy recovers.
While this economic recovery is unlikely to materialise in the coming months, Holland predicts that over the coming years, property returns should, subject to the movement in interest rates, improve to at least pre-lockdown levels, off the current low valuation base. At the end of the day, the need for commercial space will continue to escalate for businesses across various sectors, ensuring improved returns as the economy recovers.
Regarding the currently distressed retail sector, Holland notes that while internet shopping may be taking off, this doesn’t negate the demand for commercial property. “The need for commercial space won’t just disappear – the demand may just shift from retail to warehousing which would affect the larger Malls and Regional Centres most.
The smaller convenience specialised centres and outlets, on the other hand, will still require retail space as people still like the experience of visiting businesses, shops and service providers.
In closing, property is a long-term investment. with this in mind, it’s important to take a 5 to 10 year view in assessing the effect of Covid-19 on any portfolio before making radical short-term decisions.
Owen Holland, National Asset Manager: Property Investments at Business Partners Limited
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