The FNB Commercial Property Broker Survey which surveys a sample of commercial property brokers in and around the six major metros of South Africa, namely, City of Joburg and Ekurhuleni (Greater Johannesburg), Tshwane, Ethekwini, City of Cape Town and Nelson Mandela Bay.
Given FNB Commercial Property Finance’s strong focus on the “owner-serviced” market, a pre-requisite in selecting broker respondents is that they deal in owner-serviced properties, but a portion will also have dealings in the developer or investor markets as well as in the listed sector.
In this report, FNB focuses on the part of the survey where they ask respondents to rate their perception of the buying/selling market (i.e. not rental market) activity levels on a scale of 1 to 10, 10 being the strongest activity level rating.
The term “activity” is as experienced by a property broker, and can include everything from indications of interest in buying or selling, e.g inquiries or viewings related to potential buying or listing, through to actual transaction levels.
Broker satisfaction with business conditions deteriorates markedly in the third quarter
But before FNB surveys activity level perceptions, they ask all respondents to say whether they find business conditions “satisfactory” or not in the form of a simple “yes or no” answer. In the third quarter of 2019, the percentage of respondents experiencing conditions as satisfactory declined at a more rapid rate than the prior quarter, from 64% in the second quarter to 49%.
This now means that for the first time in the thir-quarter old survey a slender majority of respondents (51%) are dis-satisfied with business conditions.
While 49% of those still satisfied remains significant, the weakening trend in confidence amongst brokers follows a similar direction to overall national business confidence, as portrayed by both the RMB-BER Business Confidence Index as well as the SACCI Business Confidence Index.
The former index reached a lowly 21 level on a scale of 0 to 100, the lowest since 1998, while the latter index has reached lows similar to those last seen in the multi-year economic contraction of the early-1990s.
Activity Rating by Major Property Class – all three sectors weaken in the third quarter
When asking brokers for their ratings of market activity levels on a scale of 1 to 10, FNB sees that the group of respondents is most upbeat (or least pessimistic perhaps) about the industrial and warehouse property market. However, this market’s third quarter activity rating did decline noticeably, recording 5.25, down from 6.03 in the prior quarter’s survey.
By comparison, the Retail Property Activity Rating was noticeably lower at 4.51 in the third quarter, down from the prior quarter’s 5.25, while the Office Property Market also declined from 5.05 in the second quarter to a lowly 4.62 in the third quarter survey.
Weakening in all three property sectors is no surprise given economic fundamentals
Weak activity levels, and the quarter-to-quarter weakening in the activity levels of all 3 major property sectors, should come as little surprise, given deteriorating business confidence in the 3rd quarter of 2019, and given the myriad of economic indicators pointing to economic weakness.
Admittedly, the survey history is too short to yet ascertain what the seasonal impacts throughout each year would be on activity ratings, so FNB needs to interpret with some caution.
But viewing the SARB Leading Business Cycle Indicator in recent months, it had suggested that, after perhaps some small quarterly economic growth improvement in the second quarter of 2019, weakening could return in the third quarter, and this is possibly what has driven the third quarter Commercial Property Broker Activity Ratings weaker.
While the leading indicator has remained in year-on-year decline each month since October 2018, the magnitude of decline had receded early in 2019 up to April, after some strong month-on-month increases. However, in May and June a sharp acceleration in the rate of decline had pointed to possible economic growth weakening once more towards the third quarter after a second quarter improvement.
A renewed economic growth weakening could be beginning to be reflected in the more noticeable declines in all three property sector activity ratings in the third quarter.
Retail seen as having weakened the most over past six months
FNB asks a follow up question as to whether the respondents have perceived a decline, increase or no change in activity levels compared with six months prior. From these results FNB compiles an index, allocating a score of +1 to each percentage points’ worth of “increased” responses, zero to that of “unchanged” responses and -1 for that of “decreased” responses. The index is thus on a scale of +100 to -100.
In the third quarter survey, the market with the highest index reading was Office, although this was nevertheless still a weak and negative reading of -3.03.
The industrial and warehouse sector index reading was a negative of -10, implying that the percentage of respondents perceiving a decrease in activity in this sector exceeded those perceiving an increase by 10 percentage points.
The retail market returned the weakest reading of the 3, a negative -17.77.
Outlook – respondents least optimistic about the retail market over next six months
FNB compiles an index using the same methodology, but this time asking brokers for their expectations of the direction of market activity in the six months ahead.
As a group, respondents are least optimistic about the retail property market, which recorded a zero index reading, whereas the industrial property market recorded a +10 and the office property market +10.61
The most noticeable weakening in expectations from the prior quarter, however, is in the Industrial Property Expectations Index, whose prior quarter reading was a solid +46.
Key drivers of brokers’ expectations – more negative perception of sentiment emerges as positive election feeling wears off
In an open-ended follow up question to the previous one regarding expectations of near term activity direction, FNB asks brokers to provide reasons as to why they expect the direction that they do.
The noticeable feature in this set of responses for the third quarter 2019 survey was a very significant jump in the percentage of respondents pointing to “Economic and Political Uncertainty” and a significant decline in the percentage pointing to “Business Positive Sentiment”, after a “once-off” post election second quarter drop in the former and a spike in the latter.
This negative “turnaround” in perceptions of market sentiment in the third quarter is witnessed in all three major segment surveys.
• The Office Market
In the second quarter survey, the office property component had shown 51% of respondents perceiving “Business Positive Sentiment” and a far lesser 25% perceiving “Economic and Political Uncertainty” as a key factor influencing their near-term expectations of activity.
In the third quarter survey, these 2 percentages swung sharply in the office market component, with only 19.7% perceiving “Business Positive Sentiment” and a greater 46.97% citing “Economic and Political Uncertainty”.
Within the ”Economic and Political Uncertainty” sub-categories, the weak economy comes through most strongly as an influencing factor on near term expectations, with policy uncertainty promoting a “wait-and-see” investor attitude also significant.
• The Industrial and Warehouse Market
The picture was similar in the industrial and warehouse property market component. After 25% of respondents cited “Economic and Political Uncertainty” and 39% perceived “Business Positive Sentiment” in the second quarter survey, the third quarter survey swung sharply to 50% citing the former and only 11.67% of respondents pointing to the latter as key factors.
• The Retail Property Market
In the retail property market component, after 25% of respondents cited “Economic and Political Uncertainty” and 33% perceiving “Business Positive Sentiment” in the second quarter survey, the third quarter survey saw a swing to 40% citing the former and 13.33% of respondents pointing to the latter factor.
Online retail seen as having less of an impact than the state of the economy at this stage
In recent times, while acknowledging that online shopping is having some impact on retail and retail property, FNB has been of the belief that the weak economy and resultant weak consumer financial situation has had more of a negative impact on this sector. The FNB Property Broker Survey appears to echo this sentiment.
26.67% of respondents in the Retail Property Survey component pointed towards “Difficult Trading Conditions” in the third quarter survey, up from 15% in the previous quarter. Within this major category, 17.78% of total respondents pointed to “Shoppers moving online” (compared to 10% in the second quarter survey) as a factor driving less feet in malls, with the younger generation in particular preferring online shopping.
This is becoming a key factor in the survey, although not quite seen as big an influence on activity as the economic conditions.
By comparison, 26.67% of respondents cited the weak economy (a sub-category of “Economic and Political Uncertainty”) as a negative influencing factor in their near term expectations..
The weak state of the economy thus still appears to me more of a concern to the respondents than the online shopping challenge to traditional retail, although online shopping is becoming significant.
In this first part of the FNB Property Broker Survey, which relates to perceived market activity, there has been a clear deterioration in perceptions regarding recent activity as well as near term expectations.
This shouldn’t come as a surprise as South Africa’s long term economic stagnation continues.
A noticeable change in the third quarter was a perceived weakening in activity in the industrial property sector. This sector had bucked the weakening trend in the retail and office property sectors in the second quarter, with respondents having perceived a second quarter strengthening in the industrial property market.
But ultimately, the weak economic fundamentals related to industrial property could be expected to dampen demand for this property class, and thus market activity, and in the third quarter survey this appeared to happen.
Although the respondents perceived the industrial and warehouse property market to be weakening too, their perception is that this market still has the strongest activity level of the three markets, followed by the office market, with retail being the weakest.
Compared to sic months prior to the third quarter survey, the respondents on aggregate perceived all three markets to have weakened in terms of activity levels, with the industrial and warehouse market having weakened the most significantly off the highest base.
Looking ahead to expected activity in the coming six months, the group expects moderate increases in the office, and industrial and warehouse markets’ activity and unchanged retail market activity.
However, sentiment in the third quarter has deteriorated markedly compared to the second quarter, with any perceived election-induced positivity having seemingly worn off, and the stagnating economy has once again become the key focus and driver of expectations.
Finally, while online shopping is perceived as a potential negative impact for retail property, the weak state of the economy still appears to be seen as a more significant factor.