Property brokers, in and around South Africa’s six major metros i.e., City of Johannesburg, Ekurhuleni (Greater Johannesburg), Tshwane, eThekwini, the City of Cape Town and Nelson Mandela Bay, have seen higher activity in industrial, retail, and office markets but, they believe that recovery momentum may be slowing.
FNB’s 3rd Quarter 2021 Property Broker Survey of Rental Market Conditions highlights high levels of optimism emanating from the industrial and warehouse property markets with their activity ratings rising from 4.5 during Q2’s lockdown to 6.58 in Q3. However, during 2021, these two sectors’ activity ratings have made little progress since the 2021 Q1 6.51 reading.
The retail sector has also seen strength in its market activity rating from a 3.62 low during 2020’s Q2 to 5.31 by 2021’s Q3, the fifth consecutive quarter increase.
The office sector’s activity rating has been less significant, from 3.70 during 2020’s Q2 to 4.03 during Q3 of 2021, leaving it as the lowest rating of all the three major commercial property sectors.
While the industrial and retail activity ratings have both improved post-lockdown, only the industrial sector has managed to recover to an activity rating above the 2020 Q1 pre-lockdown level, while retail, and most notably, office ratings, remain below pre-lockdown levels.
Activity trends over the past six months
When asked whether they believe that rental market activity in all three commercial property sectors have strengthened, weakened, or remained the same, the industrial property market returned the most positive response with an increase in its rental market activity. However, the retail and office markets’ ratings recorded weaker responses with the office market still believed to be the weakest of the three commercial property sectors.
The same line of questioning applied to vacancy rates; whether the property brokers believed that vacancy rates have risen, remained the same, or declined over the past six months. The office sector comes out as perceived to be the weakest major property class with property brokers indicating that vacancies have been rising over the past six months.
Retail, by comparison, has an almost neutral bias and industrial is the only property class of the three that has shifted to a noticeable declining vacancy rate bias. The aggregate perception of rising vacancy rates is still very strong in the office sector.
While property brokers see a strong industrial market, economic fundamentals underpinning the market are questionable
The strength in the industrial property market, and the perception of declining vacancy rates, are interesting, according to FNB, given that the economic sectors key to influencing the industrial property performance has not returned strong data.
As at Q2 2021, Manufacturing GVA (Gross Value Added) growth was a massive 42.2% year-on-year (y/y). However, this growth figure was caused by a very low base from last year’s lockdowns during Q2 and the manufacturing stagnation of recent years can be seen when compared 2021’S Q2 Real Manufacturing GVA to the more ‘normal’ Q2 of 2019, prior to the pandemic – a significant -6.3% lower than two years prior.
However, one positive factor in containing the potential build up of industrial property oversupply, would be a low level of new building activity in the sector. This would be the case compared to the boom years of pre-2008 or even 2018/2019 but recent quarters have seen a rise in both industrial space plans passed as well as those completed.
In addition to weak manufacturing output, quarterly GDP data has been recording sharp drops in economy-wide inventory levels throughout 2019 and 2020. A typical trend during a weak economy and recessionary periods, this could likely dampen warehousing demand. The property brokers, however, may be experiencing early signs of the start of a re-stocking of inventories through the economy, driving manufacturing back into positive territory and resulting in expansion plans by some.
The Manufacturing Purchasing Managers Index (MPI) New Sales Orders Sub-Index points to some strengthening i.e., a solid level in recent months.
While Rode’s data showed industrial property y/y rental inflation at a weak 0.77% y/y during Q2 of 2021, which is still negative in real inflation-adjusted terms, the most recent property broker survey suggests the possibility that industrial rental growth may begin to turn the corner back to positive territory.
However, the same cannot be said for office rentals, with Rode’s data already having reached -6.58% y/y decline in decentralized A-grade office rentals by Q2 of 2021. The survey suggests more office rental deflation is likely to follow in the near-term.
Near-term expectations – Covid-19’s impact still features on the list of issues
Near-term activity expectations among the property brokers have most often, in prior surveys, been biased towards strengthening when asked to comment on their six-months ahead expectations for rental market activity i.e., increase, decrease, or remain the same.
In the 3rd quarter 2021 survey, there was a bias towards higher near-term market activity in all three major commercial property classes with an aggregated, weaker expectation for the industrial sector.
Key factors that drive near-term activity expectations
The main factors that the property brokers cited as key influences on their near-term office market activity expectations include the Covid-19 lockdown impact (strongly on their minds) with a significant 37.84% of them seeing companies re-evaluating office space needs and in most cases, either downscaling their office space requirements or planning to do so due to greater levels of employees working from home.
10.81% of the property brokers point to the negative economic fallout from the pandemic on office-bound companies, contributing to weaker demand for office space. 8.11% of the property brokers also point to interest rate hiking as a negative demand factor for office space.
However, there is a group of more optimistic property brokers with 10.81% perceiving rentals becoming more realistic to retain and to attract tenants, 8.11% pointing to businesses preferring to lease rather than to buy, and 8.11% believing that companies want their employees back in the office.
In the industrial market, 20% of property brokers point to many businesses’ desire to lease rather than to buy. 17.5% pointed to expected small business demand for space, 12.5% perceive manufacturing to be picking up due to fewer imports taking place, 17.5% perceive rentals being reduced to attract and to retain tenants, and 17.5%, mainly from KwaZulu-Natal, perceive a frenzy of demand for space, creating stock shortages, following the massive looting and unrest-related damage in July 2021.
Surprisingly, only 5% of the property brokers point to an increased need for warehouse space as e-commerce grows.
In the retail market, 20.69% of the property brokers perceive ‘changing trading conditions’ including a combination of small businesses coming onto the retail market looking for space, and new entrepreneurs starting up. A minority (only 3.45%) see increasing online retail as a dampening force for space demand with 13.79% of property brokers seeing rentals being reduced to keep or to attract tenants.
However, a sizeable 17.4% of retail property brokers still perceive a negative impact on space demand to ensue from the recessionary ‘fall out’ from Covid-19 lockdowns and disruptions. 10.34%, mainly from KwaZulu-Natal, see the recent civil unrest and looting as having put a dampener on retail space demand.
In conclusion, property brokers perceive strengthening in all three major commercial property sectors’ rental market activity levels from the prior quarter but, they appear to be unsure in the recovery momentum of the industrial and retail property sectors.
Industrial is the only property class with an activity rating that has surpassed the pre-lockdown Q1 2020 level with the property brokers, as a group, perceiving vacancy rates to have declined since the six-months prior. They do not share the same sentiment for the retail market and the office market is still perceived to have a strong rising vacancy rate trend.
The property brokers perceive the office rental market to be the weakest of the three markets, both in terms of activity levels and vacancy trends.
FNB expects average office rentals to continue its deflation in the near-term with Rode’s data already having recorded noticeable y/y deflation in recent quarters.
In examining near-term market activity expectations, in all three major commercial property categories, the property brokers are moderately biased towards strengthening.
Concerns related to Covid-19 and its impact on the economy – and real estate – remain strong. In the office market, the biggest factor influencing expectations is how companies revise their office space needs as remote working increases with a recession-related employment decline.
In retail, interestingly, the property brokers point to a significant level of small businesses looking for space along with new business start-ups. Only a few point to online retail as a key issue but the state of the economy and the consumer remain more significant issues for the group.
The recent unrest, most notably in KwaZulu-Natal, had an impact on the survey with many of the property brokers pointing towards a flurry of demand for industrial space following the looting and damage but they perceive the civil unrest as being more negative for retail space demand.
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