News Research

The commercial property market is oversaturated says FNB

According to FNB, property brokers continue to see all three major commercial property buying or selling markets as oversupplied with the office market being the most oversupplied.

The FNB Commercial Property Broker Survey – Market Balance Q3 2021 has revealed that while the industrial market is still perceived as the strongest of the three commercial property sectors i.e., industrial, retail, and office, it is undersupplied.

However, an oversupply of property on the market relative to demand in all three property classes has continued in the 3rd quarter survey.

With the industrial property sector, it appears that all three coastal metros i.e., Cape Town, Nelson Mandela Bay, and eThekwini, are where relative market strength lies, with Gauteng metro regions being relatively weak, especially Johannesburg.

FNB expects to see a decline in average values on commercial property to decline during the remainder of 2021, following significant average value decline in 2020.

Average time on the market is still perceived as increasing in 2 of the 3 segments with industrial property the exception

The picture between the 3 major property sectors remains one where property brokers perceive industrial to be the strongest with an average time on the market for occupied properties of 20.03 weeks – an improvement on the 23.09 weeks in the case of retail and 34.65 weeks for office space.

Vacant industrial properties averaged the shortest time on the market to the tune of 23.58 weeks, compared to 25.09 weeks in the case of retail space and 32.38 weeks in the case of office space in the 3rd quarter 2021 survey.

Interestingly, vacant office properties are perceived to be selling slightly faster than occupied office properties for the first time since the survey was launched in 2019. This may imply that vacant office properties for repurposing are becoming more popular in the market, but it may be too early to tell.

Perceptions regarding the direction of ‘average time on the market’ over the past 6 months

The property brokers are asked whether they believe that the average time on the market has increased, decreased, or stayed the same since the 6 months prior i.e., since 2021’s first quarter.

While the office and retail sectors returned a positive number, implying that most of the responses point towards an increase (market balance weakening) in average time of properties on the market compared to the 6 months prior, this increased bias has been seen consistently in quarterly surveys since early-to-mid 2019.

The office index showed the weakest reading during the third quarter (+33.34), which was mildly up from the +20.63 of the previous quarter. The retail index showed a similar reading of +19.56 during the third quarter of 2021, also slightly higher than its prior quarter of +13.47.

The only market to buck the trend appears to have been industrial, which showed a negative reading of -10, indicating a bias towards declining average time on the market for the third consecutive quarter and pointing to an improving demand-supply balance in this market.

Industrial property is the only market turning to a declining trend since early-2021, sometime after the end of hard lockdown.

The ‘increasing time on market’ bias has become less pronounced in the office and retail sectors since spikes in the 2 winter quarters of 2020. This has much to do with the end of hard lockdowns that happened around that time. It was difficult to do property trades during hard lockdowns, while the economy was in an extremely deep recession but the fact that the brokers still have a bias towards lengthening average time on market continues to reflect the recessionary economic times in which South Africa finds itself, with Real GDP still not back to 2019 pre-Covid-19 levels.

Demand versus supply strength perceptions

In all three property sectors, the property brokers point to ‘supply exceeding demand’, either ‘somewhat’ or ‘far’ with the industrial market possessing the lowest percentage of property brokers i.e., 53.3% who believe supply exceeds demand, whereas 78.2% believe supply to exceed demand in retail property and 93.3% in the office property market.

All three sectors were recorded as negative in the third quarter survey with the industrial property market least so on a -34.99 reading, followed by retail at -110.87 and office being the weakest at -161.67.

In short, all three markets are perceived to be oversupplied with the industrial market undersupplied, followed by retail and then office.

Provincial comparisons: demand versus supply strength perceptions

The office market survey points to Greater Johannesburg having the weakest demand versus supply balance with its index being the most negative at -188.68. This reading is only marginally weaker than the other 4 metro regions which are all showing oversupplied readings between -126.25 (Cape Town) and -182.64 (Nelson Mandela Bay).

In the industrial property market survey, the 3 coastal metros come out relatively stronger than the Gauteng metros with eThekwini producing a positive reading of +61.8 followed by Nelson Mandela Bay’s ‘0’ and Cape Town with -38.89.

At the weakest end of the industrial property market sits Greater Johannesburg with a negative index reading of -113.24, followed by Tshwane with -82.15.

In the retail property sector, the survey points to a significant oversupply across all 5 metro regions.

Tshwane emerged as the weakest market with a negative reading of -145.9, followed by Nelson Mandela Bay with -140. Cape Town is perceived as the ‘least weak’ of the 5 major coastal metros (-71.44) and eThekwini with -82.85.

Conclusion

Overall, property brokers believe that demand, relative to supply, remains weak, regardless of whether one views the bias towards increasing time on the market.

After a deterioration in property broker oversupply perceptions in the office market, up to the end of 2020, the office supply-demand perception index readings have slightly improved from a historic (and weakest) -167 reading during 2020’s final quarter to a less weak -167.67 by 2021’s third quarter.

Since the retail market’s worst ‘oversupplied’ reading of -139 as at the second quarter of 2020, it has made more progress towards a ‘balance’ than the office market which recorded a negative -110.87 as at 2021’s third quarter.

On the other hand, the industrial market has made the most progress towards restoring balance, with its ‘oversupplied’ reading diminishing from -139 as at the second quarter of 2020 to -34.99 by 2021’s third quarter.

But the fact that all three markets have a significantly ‘oversupplied’ bias appears reflective of the deep economic recession which South Africa’s economy has gone through (and the stagnation of the economy over many years prior to the 2020 lockdowns), and it has still not fully recovered to pre-Covid-19 GDP levels. This economic weakness is bound to contain demand for commercial property.

Real GDP grew at a massive year-on-year (y/y) rate of +19.27% during the second quarter of 2021. However, this was largely due to a very low base created during the second quarter of 2020 due to the hard lockdowns which resulted in a sharp drop in GDP during that quarter.

In comparison to 2019’s second quarter, 2021’s second quarter GDP was still -0.7% down.

The oversupplied markets accompanied by ongoing GDP weakness leads FNV to anticipate a decline in average property values to continue in 2021, most notably in office, less so in retail, and the least in industrial.

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