FNB broker survey reveals industrial rental market most buoyant

As in the case of the buying and selling market survey, brokers perceive the most buoyant conditions to be in the industrial rental market. However, activity ratings have declined in all three markets. Some Retail respondents note online shopping as an issue, but general economic weakness remains the key one.

In this report, FNB discusses the fourth quarter 2019 results of the rental market component of 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.

FNB asks survey respondents to provide a rating of rental market activity as they perceive it, on a scale of 1 to 10, with 10 being the strongest level of activity. Similar to FNB’s buying and selling survey component, the rental market survey component still shows the highest levels of optimism emanating from the industrial and warehouse property market respondents. However, in this segment, the activity rating declined from 5.96 in the third quarter to 5.71 in the fourth quarter. The weakest response, however, came from the retail sector, whose activity rating declined from 5.85 in the third quarter to 4.92 in the fourth quarter, while the office sector was somewhere in between with a decline from 6.09 to 5.37 over the two quarters.

Activity trend over the past six months

FNB asks a follow up question to the activity rating, asking respondents whether they believe that rental market activity has strengthened, weakened or remained the same since six months prior (i.e. since the second quarter of 2019).

Out of the responses, FNB creates an index by allocating a +1 score to an “increased” response, a zero to an “unchanged” response and a negative -1 to a “declined” response.

The scale of the “Index for direction of change in rental market activity over the past six months” is thus from +100 to -100. A score of +100 would imply that 100% of respondents perceived an increase in time on the market over the past six months and -100 would imply 100% of respondents perceiving a weakening, while a zero level would mean that those providing an “increased” response equals those responding with “decline”.

Of the three property classes, the industrial property survey returned a positive reading of +16, implying that 16 percentage points’ more respondents perceived an increase in rental market activity than those who perceived a decline. This appears somewhat contradictory with the industrial activity ratings, which have shown a noticeable decline since two quarters prior, however. But one must bear in mind that respondent samples change each quarter, and both questions are based on perceptions and not “exact science”. The two seemingly divergent results in the different questions for industrial property perhaps suggest that a weakening trend is not yet “confirmed” in the industrial property market.

By comparison, the readings in the retail and office markets’ for this response pointed weaker, Office with a negative -7 and retail with a negative -13, in line with their decline in activity ratings since two quarters prior.

Vacancy Trends

Using the same methodology as above, FNB compiles an index on a scale of +100 to -100 for the responses as to whether vacancy rates have risen, remained the same or declined over the past six months.

Here, there is little to choose between the property sub-sectors, with the respondents in all three sectors biased towards a rising recent vacancy rate trend.

The retail property sector had a fourth quarter reading of +27, indicating that 27 percentage points’ worth more respondents perceived vacancy rates to have risen than those perceiving a decline.

The industrial property reading of +28 was virtually the same as retail, while the office property reading was the highest with +33.

The aggregate perception of rising vacancy rates is thus noticeable across all three property sectors.

Near term expectations – economic weakness dominates the list of issues.

Near term activity expectations amongst survey respondents remain biased towards strengthening, when we ask them to provide their six-months ahead expectations for rental market activity (i.e. increase, decrease or remain the same). However, this is less the case than two quarters ago.

There is a slight bit more of a “positive seasonality” boost expected by respondents in the fourth quarter, compared to the third quarter. It is also possible that there exists some inherent bias towards the “positive”, when future expectations are surveyed, something FNB appears to see in forecasting economists’ reluctance to forecast bouts of negative growth that periodically happen.

The Rental Market Activity Near Term Expectations Index for the industrial and warehouse market was +32, up from +18.3 in the prior quarter, but well down on the +67 of two quarters prior.

By comparison, the Retail Expectations Index was also biased in favour of “activity strengthening” to come, but far more moderately so with a +13 reading, while the Office Market Expectations Index was more strongly biased in favour of increase, with a positive reading of +35..

Key factors that drive near term activity expectations

•             Economic and political factors are the key negative

Some expectation of “Positive seasonal factors” appeared in the fourth quarter broker survey, with 22% of respondents citing this as a factor in the office Sector, 13% in the industrial Sector, and 8% in the case of retail.

But positive seasonal factors aside, they did not appear to see too much to enthuse about, with “Economic and Political Uncertainty” being the main single issue cited by respondents. In the case of office space, 29% of respondents cited this factor as an issue, a similar 27% in the case of industrial property, and a more significant 39% in the case of retail.

This factor is far more prevalent than those citing “Positive Business Sentiment”, which amounts to 4% in the case of office property, 8% in the case of industrial property, and 5% in the case of retail.

Therefore, while the respondents as a group lean mildly towards strengthening activity in the near term, a strongly negative picture comes out in their response regarding the key issues in the market, seasonal factors aside, with far more pointing towards weak and uncertain economic conditions than those perceiving any positive business sentiment.

•             Retail’s “additional” challenges

In the case of retail property, FNB looks at the “issues” response for signs of the impact of online shopping. 13% of respondents point to online shopping having a negative impact on the numbers of visitors to malls.

FNB has also perceived rentals in shopping centres to create more of an affordability challenge than in the other two property classes. This difference doesn’t come though strongly in the survey though. 13% point to very high rentals creating an affordability challenge in retail. This issue of “pricing” is a slightly lesser 10% in the case of industrial property and the same in the office property survey.