FNB COMMERCIAL PROPERTY SURVEY – IMPROVEMENT BUT NO RECOVERY
WORDS: JOHN LOOS, PROPERTY SECTOR STRATEGIST, FNB COMMERICAL PROPERTY FINANCE
The 1st Quarter 2021 FNB Commercial Property Broker Survey that surveys broker perceptions of buying/selling market activity continued to show rising activity ratings in all three classes, i.e. the industrial, retail and office property classes.
The industrial property market recorded the highest activity rating to the tune of 5.44 on a scale of 1 to 10, the retail property market 4.18 while the beleaguered office property market was the weakest with a lowly 3.39 rating.
In the case of all three markets, the activity ratings in the 1st quarter represented a further strengthening on the previous quarter’s readings but, in all three cases, the levels have not yet recovered to the pre-lockdown levels recorded in the 1st quarter of 2020 survey.
The fact that the activity ratings are rising but not yet back to “fully recovered” – i.e. pre-lockdown levels, appears more-or-less reflective of recent economic data. Real GDP (Gross Domestic Product) growth remained negative in the final quarter of 2020 at -4.13% year-on-year, which is significantly better than the -17.78% 2nd quarter 2020 drop, but at the same time also not “fully” recovered.
Interest rates are very low, having declined by 300 basis points last year. But, unlike interest rate-sensitive residential property, the commercial property market typically tracks the economy’s movements more closely and this appears to again be the case.
There are some extra factors over and above the economic cycle which may explain the differences in strength between the three major commercial property sectors.
The brokers perceive all three sectors to have been heavily impacted by lockdown and the resultant deep recession. However, they implicitly explain their greater optimism in industrial property is due in part to its greater affordability compared to the other two property sectors. In addition, they believe that an additional source of demand for industrial emanates from a greater move to online retail, necessitating increased warehousing and logistics space.
They don’t however, perceive retail property to be as challenged by technological progress and online activity as retail office space which they believe has been severely impacted by the lockdown-induced surge in working from home (WFH).
Over 40% of brokers surveyed see office-bound companies revising their office space needs and in many cases downscaling. The planned downscaling is not only due to greater levels of WFH, however. Office space demand is also heavily influenced by employment trends in the Finance, Real Estate and Business Services (FREBS) Sector. This sector’s employment dropped by a massive -7% year-on-year in the 2nd and 3rd quarters of 2020. This alone is likely to translate into a significant drop in office space required by the sector.
Looking ahead at the near term, brokers are most upbeat about industrial property. In this category, they expect market activity, on average, to increase the most in the next six months. A mild positive increase is expected for the retail property market and a decline in office market activity.
Moderate expectations for the commercial property sector overall seem appropriate. High frequency economic data in recent months’ points to the pace of economic recovery slowing. Month-on-month growth in the OECD’s version of the Leading Business Cycle Indicator for South Africa slowed consistently from a June 2020 high of 2.9% to a virtually insignificant +0.06% in January 2021, suggesting slowing economic growth acceleration to come.
And indeed, we saw the large manufacturing sector’s year-on-year growth moving into negative territory in January 2021 (-3.4%) once more, after its first positive growth spurt since early-2019 in December 2020. Real goods retail sales remained in negative territory in January (-3.5%) as did electricity production (-2.4%).
These weak economic numbers are reflected in weak national business confidence. The RMB-BER Business Confidence Index recorded only 35 on a scale of 0 to 100 in the first quarter, down from 40 in the prior quarter, while property broker business confidence is also a lowly 26 on a scale of 0 to 100.
Recent economic numbers, therefore, suggest little further recovery early in 2021. Achieving further strengthening in commercial property market activity levels could thus be tough going, especially in the office market with its recent major employment decline along with the big WFH structural change.
With regard to relative performances of property sectors, brokers now appear to see the office property market as becoming the underperformer of the three markets, with the retail property market recovering more noticeably after a very poor 2020.