COVID PUTS PRESSURE ON COMMERCIAL PROPERTY
The economic and financial impacts of the COVID-19 lockdown will persist and John Loos, Property Sector Strategist at First National Bank (FNB) Commercial Property Finance, believes that the inevitable lag and slow recovery will see pressure increasing in the commercial property sector.
“I do expect such financial pressure-related selling to remain at least high as the level that brokers perceived in Q4 2020, through 2021,” he told Out&About.
He indicated that the economy appeared to have stagnated once more in the late stages of 2020 after an initial Q3 post-lockdown rebound. This is in line with our expectation that, while GDP will show some positive growth in 2021, that will be insufficient to lift GDP levels back up to pre-COVID 19 2019 levels.
“This implies sustained pressure for an already pressure business sector. Businesses often ‘hold out’ for a while after an economic shock but, in the absence of full recovery, sustained economic pressure eventually takes its toll on a portion of them. Typically, a lot of the responses by business to economic shocks come with a considerable lag. So, late in 2020, we saw more noticeable year-on-year growth in liquidations for instance.
OWNER OCCUPIERS UNDER PRESSURE
FNB’s Commercial Property Broker Survey, which surveys a sample of commercial property brokers in the six major metros of South Africa – Joburg and Ekurhuleni (Greater Johannesburg), Tshwane, eThekwini, Cape Town and Nelson Mandela Bay – pointed to financial pressure amongst property owner-occupiers remaining “elevated” even after the hard lockdown of the 2nd quarter of 2020 has eased.
By year end, it seems that the estimated percentage of sellers selling in order to downscale due to financial pressure remained relatively high compared to the pre-lockdown surveys, and was still rising.
This latest survey confirmed Loos’s belief that the lagged economic and financial impacts of COVID-19 lockdown period continued and would do so for a lengthy period of time. The survey also supported his “full” post-lockdown economic recovery will be slow.
Focusing on the key drivers of movement and sales activity in owner-serviced properties, the survey results showed financial pressure to still be by far the biggest single driver. This factor became noticeably more prominent in the 2nd quarter 2020 survey as COVID-19 lockdowns hit and remained “elevated and rising” in the 4th quarter survey.
“We ask respondents for their perception of the major drivers of movement and sales activity in the Owner-Serviced Property segment. They estimate the percentage of movement and sales that they believe would take place for a particular reason. The total percentage of all the reasons can add up to more than 100% because businesses can be selling or relocating for more than 1 reason. It isn’t an exact science, therefore, but gives a broad picture, and what comes out of it is that by far the highest percentage of owner occupiers are perceived to be selling or relocating influenced by financial constraints/pressures, i.e. 65.33% in the 4th quarter 2020 survey. This is a further rise from the 3rd quarter’s 56.7%, as well as about 22 percentage points higher than the 43.1% recorded in the 1st quarter of 2020,” Loos explained.
He pointed out that this most recent level would appear to be very significant with the two other significant motives being “relocating to be closer to the business’ particular market (27.2%) and “looking for a location with better access to transport, logistics and commuter nodes” (21.75%).
DEMAND FOR BIGGER AND BETTER PREMISES LOW
Examining where, by region, the greatest level of financial pressure-related selling or relocation is perceived to be, it turns out to be the Gauteng regions, as was the case in the previous quarter, Tshwane being the highest at 77.5% of sellers, followed by Greater Johannesburg with 66.7%.
However, sales and relocation for “bigger and better premises” remained at a lowly 12.9% in the 4th quarter survey. This was mildly higher than the 9% of the prior quarter, but it remained far below the 22.4% estimate from the 3rd quarter of 2019.
“This percentage declined in prominence as economic and financial times toughened already prior to COVID-19 lockdown, but then declined far more noticeably in the 2nd quarter of 2020 as lockdown caused the recession to go far deeper. The 4th quarter mild increase is perhaps reflective of economic and property market trading activity largely normalizing following the 2nd quarter hard lockdown, but with financial constraints still containing it to relatively low levels,” Loos said.
He added: “Examining where, by region, the greatest level of financial pressure-related selling or relocation is perceived to be, it turns out to be the Gauteng regions, as was the case in the previous quarter, Tshwane being the highest at 77.5% of sellers, followed by Greater Johannesburg with 66.7%.
The three coastal metros fared better with Cape Town recording 60.4% of sellers perceived to be selling for financial pressure-related reasons, eThekwini 60.3% and Nelson Mandela Bay 57%. However, all five regions’ percentages remained elevated compared to just prior to lockdown – and all five rose in the 4th quarter of 2020.