The various Commercial Property Segments performances in the past 2 periods of weakness

During periods of property market weakness that have occurred in the past 2 decades, the Retail Property Sector appears to have been least prone to capital depreciation, although the smaller retail centres have experienced some depreciation periodically. Linked to the weaker and more cyclical Manufacturing Sector, however, Industrial Property had a 1998-2002 period of significant capital depreciation, as did Office Space with its links to employment in the Finance, Real Estate and Business Services Sector. In times of weakness, weak CBD Office Property performance suggests that “prime” nodes may be a better bet.


Going into an economic downturn, which typically can mean something of a property downturn too, FNB looks back at the last 2 periods of economic and property weakness to see which property segments weathered the “storm” best.

Before, though, FNB examinea the major economic drivers of each major property sector to see what is thought should have been the case.

Real Retail and Wholesale GVA (Gross Value Added) should be the key economic driver of Retail Property performance, Manufacturing GVA should be most strongly tied to Industrial Property’s fortunes, and the large Finance, Real Estate and Business Services Sector is believed to be the key influencing sector when it comes to Office Property demand. However, it is not the latter’s sector’s GVA that is that important, but rather its employment levels and growth, because it is staffing requirements of businesses that largely drive their office space requirements as opposed to their output.

Examining the cumulative growth of the 3 key sectoral variables shows the Industrial Sector’s key driver, i.e. Manufacturing GVA, to be the “weakest link, having only grown by 49.08% since 1996 (up to 2015). The Employment numbers for the Finance, Real Estate and Business Services Sector fared better with 76.26% cumulative growth. The potentially positive impact of this growth in employment, however, may have been curtailed in part by significant “densification” of staff in the work place, along with technology-driven reductions in the need for storage space, which has significantly improved the utilization of office space.

Retail and Wholesale Trade, Catering and Accommodation GVA’s cumulative rise of 90.2% over the period suggests that Retail Property should have had the most solid growth in demand over the period. This relatively strong long term growth in the retail Property’s key driving economic sector should have contributed to it being more likely to weather a downturn well … but much also depends on the sector’s cyclicality in the downturn.

When it comes to cyclicality, the Manufacturing Sector is typically the most cyclical/volatile. Back in the property “soft patch” of the late-90s early-2000s just prior to the boom period, Manufacturing GVA dipped into negative growth territory twice, recording a -0.2% decline in 1998 and another dip to -1.5% in 2003. By comparison, Retail and Wholesale Trade GVA bottomed at positive growth of 1.9% in 2001.

During that weak period, employment in the Finance, Real Estate and Business Services Sector also dipped into negative territory to the tune of -1.64% in 2001.

During the 2008/9 recession, it was the Manufacturing Sector showing by far the most severe dip in GVA to -10.6% decline in 2009, while the Retail and Wholesale GVA and Finance, Real Estate and Business Services Employment growth dipped to less severe negatives of -1.12% and -1.11% respectively.

However, both the Manufacturing, and Retail and Wholesale Trade GVA growth rates recovered very quickly in 2010 on the back of huge global and domestic monetary stimulus. The Finance and Real Estate Sector Employment Rate, by comparison, took far longer, its growth only peaking 3 years later than the former 2 sectors in 2013. Post-2009, therefore, it should perhaps have been Office Space that was the under performer.

Does the history of industry/employment performance of the past 2 decades point to a greater propensity for capital depreciation in the case of Industrial and Office Space, compared with a more stable Retail Property sector over this period? Indeed it does appear to?

Over the period 1998 to 2002, IPD data points to significant value decline in the areas of Industrial and Office Property, whereas Retail Property largely sailed through that weak period more smoothly.

In 1998, the year of that big interest rate spike to Prime of 25.5%, Office Space recorded -7.4% capital depreciation net of capital expenditure, while Industrial Property recorded -7.7% decline.

Retail Property by comparison bottomed at a slightly positive +0.1%.

In 2009, the most recent though short-lived recession, once again Office and Industrial Property showed capital depreciation (net of capital expenditure) to the tune of -1.5% and -0.2% respectively, while Retail showed low positive growth of +1.2%.

As vacancy rates blew out more severely in the Office and Industrial Sectors, pricing power of landlords appeared far more constrained in these 2 sectors at the time. The result was a decline in base rentals in both Industrial and Office Space at stages from 2001 and 2003, whereas Retail Base Rental growth remained strongly positive.

Examining the cumulative capital depreciation rates (net of capital expenditure), as provided by IPD, for the period 1998-2002 in greater detail, however, FNB sees that not all Retail Property was exempt from capital depreciation. Over the period, the smaller Neighbourhood and Community Shopping Centre categories saw mild -3.5% and -2.8% capital depreciation rates net of capital expenditure, whereas the stronger Small Regional and Regional Centres showed solid capital appreciation of +14.1% and +22% respectively. Should it be a surprise? In many cases it is the larger retail centres that have in the past had the stronger “pulling power” for clientele through tougher times, and perhaps the stronger tenants on average too.

All of the major Industrial Property categories showed cumulative capital depreciation through that 1998-2002 period, as did those of Office Space. However, perhaps a further insight gained from examining sub-segments is the likelihood that “marginal” nodes can perform far worse than “prime” nodes. FNB says this because IPD reported Inner City Office Space (with many inner cities battling decay, a notable exception being Cape Town) as having a cumulative capital depreciation of -36.4% from 1998 to 2002, far more extreme than the -3% depreciation for decentralized Office Space.

In conclusion, over the past 2 periods of property weakness, i.e those of the late-90s/early-2000s, and that of 2008/9, the Office and Industrial Property categories were more prone to weakness and capital depreciation than in the case of Retail Property. Much of this arguably had to do with the Retail and Wholesale Economic Sector showing stronger long term growth than both Finance, Real Estate and Business Services Employment growth, and Manufacturing growth, 2 key macro drivers of Office and Industrial Property demand respectively. The latter 2 macro drivers have also been more cyclical than that of Retail and Wholesale GVA growth.

But the Retail Property Sector has not been free of capital depreciation, with smaller centres having experienced some depreciation over the 1998-2002 period as well as in 2008/9 recession. Bigger appears to have been better in tougher times in retail. Then, a sharp Inner City Office Space capital depreciation during the 1998 to 2002 weak period suggests to us that the more prime nodes and properties weather downturns better as a rule of thumb.

This view is perhaps best supported by viewing Rode’s Capitalisation Rate times series for Joburg CBD A-Grade Office Space, which showed significantly more upward movement in the 2 periods of economic and property market weakness than was the case for decentralized Joburg Office nodes. This happened both in the late-90s as well as around the 2008/99 recession.

Read more here: Property Barometer_Property_Segment_Performance_in_Downturns_Aug_2016