The FNB Commercial Property Broker Survey Q4 2020 reveals that financial pressure is the biggest driver of movement and sales activity in owner-serviced properties.
During this period, 65.33% of owner-occupiers surveyed were selling their properties or relocating due to financial constraints. In the third quarter of 2020, this figure stood at 56.7%.
This was 22 percentage points higher than the 43.1% recorded in the first quarter of 2020, according to FNB.
Owner-occupiers moving to be closer to their markets accounted for 27.2% of total, with those looking for better premises accounting for 12.85%.
Those looking for better access to transport/logistics/commuter nodes, and those looking for/or attracted to more reliable utilities accounted for 21.75% and 12.3% respectively.
John Loos, property strategist at FNB Commercial Property Finance, says that many owner-occupiers who are downscaling due to financial strain may choose instead, to rent affordable commercial space or send their staff to work from home.
“I suspect that those who ‘buy down’ would increasingly be getting price discounts as the average market value drops.”
The MSCI data showed a −5.2% drop in average All Property valuations in the first half of 2020. “I believe this declining trend can continue into 2021, and that buyers/investors will increasingly be picking up lower value purchases,” says Loos.
According to the report, owner-occupiers in Gauteng recorded high levels of financial pressure- related selling or relocation, as in the previous quarter.
Within the region, the City of Tshwane accounted for 77.5% of sellers, followed by Greater Johannesburg with 66.7%.
Cape Town came in at 60.4%, Ethekwini at 60.3% and Nelson Mandela Bay recorded 57%.
Although the bank does not have specific data to show what commercial property landlords are doing on a macro-scale, there can be little doubt that financial pressure has been rising over the past year or longer. “I draw this conclusion from looking at commercial property tenant payment performance as per TPN Credit Bureau data,” points out Loos.
According to the TPN Commercial Rental Monitor Q3 2020, the percentage of total commercial property tenants that were in good standing with landlords was 56.19%.
Loos says that this remains far below the 77.85% recorded in the first quarter of 2020 just prior to lockdown, and that level was already somewhat worse than the 83% around 2017.
“Additionally, we have seen the average vacancy rate for all commercial property rising for a few years now.”
Is the sector worth investing into?
Loos says there are many questions than answers surrounding the future of commercial real estate investments.
“We know that the economy is weak. Structural changes in the way we live, work and play are causing greater uncertainty for investors.”
South Africa’s economy is very weak, with the Bureau for Economic Research (BER) pointing out that SA real GDP (growth domestic product) averaged 0.9% between 2010 and 2019.
In per capita terms, GDP was below population growth, according to BER.
Loos believes that the commercial property sector is gradually becoming better for investors because of declining property values. However, we are still some time away from the bottom of the property cycle, which would be the best time to invest.
“Investing in the sector is currently challenging. This is not so much due to the normal property cycle’s downturn, but due to the big structural changes that are technology, and Covid-19 induced,” says Loos.
For example, Loos asks questions such as how the retail sector can repurpose excess space, and how the logistics sector can address the costly ‘last-mile’ distribution challenge.
Loos notes that the oversupplied office sector needs to rethink ways in which to fill vacancies, this, as many companies are increasingly looking to remote working concepts.
Edited by Gudrun Kaiser