Commercial property showing signs of life
It feels like forever since we last commented on the state of South Africa’s commercial property market, with much of our writing on the matter based on economic- or investment-focused presentations that took place in 2020/2021 and further skewed by the pandemic overhang. A common theme emerging from these presentations was that the office and retail sectors had been hard-hit by rising vacancies caused by a combination of lockdown, tough economic conditions and the work-from-home trend… The outlook for the industrial sector was more positive, but varied with on the type of property: well-located logistics premises seemed to do better than others.
Hybrid work killed the property star
This writer’s often cynical view of the sector is backed up by informal chats with colleagues and friends who insist that their employers continue to reduce office space as hybrid home / office work arrangements become mainstream as well as the occasional visit to regional shopping centres that feature plenty of “to let” signs. This and other anecdotal ‘evidence’ points to a floundering commercial property market that may take years to recover, if at all. Imagine our surprise, therefore, when the Q1 2022 FNB Broker Survey painted a scene of declining vacancy rates in all three commercial property sectors. Most importantly, it signalled a trend-shift in the previously ailing office and retail segments!
“Industrial property vacancy rates have been perceived as declining for some time,” wrote John Loos, Property Sector Strategist at FNB Commercial Property Finance, in his note to the Q1 2022 survey. “The results point to a more recent turnaround in office and retail property vacancies, which were seen to be rising until recently”. He credited the trend reversal to the ongoing “normalisation in domestic economic activity” as South Africa emerges from pandemic, coupled with “greater rates of new business formation and perhaps expansion”.
The workings of a perception survey
The FNB Broker Survey is a perception survey that aggregates responses from participating commercial property brokers. The bank asks respondents whether they believe vacancy rates have increased, decreased or remained the same over the six months prior to the survey, and then calculates an index score based on their response. The index score ranges from a maximum of 100, which would indicate that all respondents perceive an increase in vacancy rates [worsening of the market] over the prior six months, to a score of -100, implying that all respondent perceive a decline in vacancy rates [improvement].
“The relatively strong industrial property market’s average vacancy rate is still perceived to be on a declining vacancy trend [improving], and its survey response points to a broker group still showing strong conviction as to the strength of this trend,” said Loos. The industrial property sector’s ‘Index for Direction of Change In Vacancy Rate’ came in at -50 points in Q1 2022, confirming that two out of three respondents in this sector perceived vacancy rates to be declining between October 2021 and March 2022. This index has been in a declining vacancy trend for five consecutive quarters.
An apparent resurgence in retail property
According to Loos, the retail property sector’s index level “had been hovering at or around zero for the past five quarters, with the Q4 2021 reading being slightly in declining vacancy territory to the tune of -12.5 points. “This reading shot to -72.8 points, indicating a widespread broker perception of declining retail vacancy rates, stronger even than the industrial property result,” he said. Remember, a negative index result is good for investors and landlords in the sector as it suggests there is higher demand for rentals, and thus higher rental yields. Higher yields are not, however, guaranteed and the survey makes no finding on price action.
The latest survey contained a pleasant surprise for the straggler in the commercial property market as the office property sector’s index climbed to a significant negative reading of -26.8 points following a 2.4 reading in the prior quarter. “Should this perception be accurate, and should it hold in future, this could be some mildly good news for office landlords, many of whom have seen a sharp rise in vacancy rates in recent years,” said Loos, who then proceeded to cast doubt on the veracity of the brokers’ findings. It turns out that the MSCI bi-annual data showed a 17.9% national office vacancy rate in the first half of 2021, expanding to 20% in the second half.
Strong economic fundamentals
FNB attributes the upbeat Q1 2022 Brokery Survey findings to “improved fundamentals” including the normalisation in economic activity and social interaction experienced between January and March 2022. “During 2021 we saw significant recovery in the economy out of the recession of the 2020 lockdown year, and this appears to be continuing into 2022,” said Loos. Commercial property brokers’ perceptions of South Africa Inc and the prospects in their respective sectors are no doubt ‘coloured’ by their personal experience of the lifting of tough lockdown regulations alongside the apparent abatement of the pandemic threat.
They also seem confident in South Africa’s small, medium and micro enterprises (SMMEs) to drive the recovery over the remainder of the year, regardless of the myriad socio-political challenges the country faces. Many of the survey participants confirmed a strong small business theme by identifying “growth in the smally business sector” and “entrepreneurs opening new businesses” as underpins for the decline in vacancy rates. In the retail property sector survey, 27.3% of brokers made mention of the former and 18.18% the latter. “The perception of growth in the small business segment was noticeable across all three property classes, but most notable in retail,” said Loos. This could account for the significant improvement in the retail property vacancy survey response.
Intriguing times as uncertainties remain
The survey mentioned other themes worth considering insofar office property vacancies including that the stock available in certain commercial property sectors was declining; that more realistic office rentals would support demand; and that employment statistics were stabilising. However, questions still surround the potential downscaling in office requirements by many companies. “We know that greater levels of work-from-home and improved use of desk space is leading to a reduction of office space requirements for many,” said Loos. “This may have significantly influenced the previously rising vacancy trend of recent years”.
Loos concluded that there are some signs that the improving vacancy trends will persist through 2022/23 including renewed growth in employment, increased small business demand, increasingly realistic rentals and probably some decline in available space; but he warned that it was too soon to conclude that we have reached a sustainable declining office vacancy trend.
Writer’s thoughts:
The Q1 2022 FNB Broker Survey was published just two weeks before the KwaZulu-Natal weather catastrophe shocked the country and businesses in that province. How do you interpret the survey’s upbeat conclusions re commercial property vacancy rates in the context of recent business shocks [such as the July 2021 riots and April 2022 KZN floods] and SA’s lacklustre GDP outlook? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
