Earlier this year, FNB Commercial Property Finance drew on the three major provincial regions’ (Gauteng, KZN and Western Cape) property markets’ ability to handle the major economic shock emanating from the pandemic-related lockdowns.
To digest such a shock, the financial and structural health of the market is important. For signs of such health, FNB reviewed the health of the region’s tenant populations which suggested that of the three big provinces in South Africa – in terms of economic and property market size – the Western Cape approached the Covid-19 crises in the best possible way.
Following the end of the ‘hard’ lockdowns and with the second quarter tenant data available, FNB looks at whether this is still the case.
The Big 3 provinces’ property tenant health
TPN – ‘Tenants in Good Standing’ stats
By late 2018, all three major provinces had seen the rental payment performance of their commercial property tenant population slide mildly from highs reached a few years prior. This was a function of a gradual economic growth stagnation in most major regions of the country.
The Western Cape was a noticeable relative outperformer, consistently maintaining the highest percentage of commercial property tenants ‘in good standing’ with their landlords regarding their rental payments over the past decade through the post-2009 Global Financial Crisis period (according to TPN data).
By the first quarter of 2020, just prior to the impact of ‘hard’ lockdown, the Western Cape’s parentage of tenants ‘in good standing’ was 86.39%, compared to 79.49% in KwaZulu-Natal and 76.27% in Gauteng.
Then came the massive weakening in tenant performance during the second quarter of the Covid-19 lockdown period and no region was spared the impact.
Yet the Western Cape managed to retain its relative advantage. Its percentage of tenants in good standing recorded 58.97%, sharply weaker than the prior quarter but still significantly above the 51.81% of KwaZulu-Natal and the very week Gauteng – at 48.89%.
On the residential rental tenant side of the market, the Western Cape has shown a consistent higher percentage of tenants in ‘good standing’ with their landlords over the past decade. In recent years, it had seen a gradual deterioration in the ‘good standing’ percentages in all three major provinces but what was striking is that the pace of deterioration in KwaZulu-Natal and Gauteng had been faster than in the Western Cape, the performance gap between itself and the other two widening.
The second quarter unsurprisingly saw a major drop in all three regions residential tenant performance, but the Western Cape still emerged in the second quarter as by far the relative outperformer.
In the second quarter of 2020, TPN data showed the Western Cape’s percentage of tenants in good standing at 80.86%, while those of KwaZulu-Natal and Gauteng were noticeably lower at 70.83% and 71.1% respectively.
Big 3 provinces’ key commercial property sector vacancy rates
Tenant performances aside, another indicator FNB regards as key in ascertaining a market’s ability to ‘hold up’ when recession arrives is the average vacancy rate of the region.
Recently released MSCI half-yearly data showed that the Western Cape, once again, fares relatively well in at least two out of the three major property sectors.
In the first half of 2020, the Western Cape had the lowest average retail property vacancy rate, according to MSCI data, to the tune of 3.26%. KwaZulu-Natal recorded a higher 4.5% while Gauteng had the highest rate of 5.76% although, all three provinces’ vacancy rates had been on the rise in recent years.
The relative picture was the same with office space with the Western Cape having the lowest average vacancy rate of 6.71%, KwaZulu-Natal with a higher 8.72% and Gauteng with a very high 17.01% rate in the first half of 2020.
The one area where the Western Cape no longer had the best performing number was industrial property where its average vacancy rate rose considerably in 2019 and registered 4.73% in the first half of 2020. Gauteng’s vacancy rate was higher at 5.89%, while KZN had a noticeably lower rate of 2.62%.
In short, of the three major provinces, indications are that the Western Cape’s tenant population, both on the residential and in the commercial property sector, continued to outperform those of Gauteng and KwaZulu-Natal during the second quarter lockdown period, despite also weakening considerably as a result of the economic and financial impact of the lockdown.
This continues to point to a greater level of average financial strength amongst both the business and residential population in that province. That relative financial strength, FNB had previously believed, could enable the province’s property market to get through the severe Covid-19 recession slightly better off than the other two major provinces, and so far, that appears to behave been the case.
Added to this, in two out of the three major property sectors (office and retail) it continued to have the lowest average vacancy rate as it approached 2020. These ‘less oversupplied’ markets, too, should assist that part of the Western Cape’s property market at least to hold up its rental and property values better.
But this is not to say that the Western Cape will not experience severe property market pressure. It will, given the magnitude of the 2020 recession that has unfolded. But it may come out of the recession in better shape than the other two major provinces.
Gauteng, on the other hand, looks to be the most vulnerable property market of the three major regions, having the weakest tenant performance in the commercial property sector, and close to the weakest in residential. In addition, this province has the highest vacancy rates in all three major commercial sectors, with its office and retail vacancy rates being the highest of the three provinces.