The Office Property Market appears to have surpassed the Retail Property Market in terms of being perceived by brokers as the weakest of the 3 major commercial property markets in South Africa.
John Loos, Property Sector Strategist for FNB says this is the overarching outcome of the latest FNB Property Broker Survey, relating to supply and demand in the Industrial, Retail and Office sector. Loos outlined the following key themes, based on the survey:
- The Industrial Property Market is still perceived to be the strongest of the three.
- However, a very weak perceived demand-supply balance in all 3 property classes has continued in the 4th quarter survey.
- In the area of Industrial Property, it appears to be that the 3 coastal metros, i.e. Cape Town, Nelson Mandela Bay and Ethekwini, are where the relative market strength lies, with Gauteng metro regions being the area of relative weakness, Johannesburg being especially weak.
- Greater Johannesburg comes out with the weakest demand-supply balance readings in all 3 major property sectors.
- Given a major bias towards “oversupply” in all 3 major commercial property markets, we remain of the expectation that 2021 will see a continuation of a decline in average values on commercial property, following our view that this was the case in 2020 (MSCI annual data not yet available for 2020).
- The Office Property Sector is seen as the weakest of the 3 major property classes, with a significant proportion of survey respondents perceiving many companies to be re-assessing their office space requirements in light of the successful lockdown-related remote working period.
“Brokers continue to see all 3 major commercial property buying/selling markets as substantially oversupplied, by segment the Office Market being the most oversupplied by major metro, with Johannesburg being the most oversupplied,” adds Loos.
Weak demand and strong supply, decline in property values expected
Loos explains that “perceptions relating to demand relative to supply remain weak, regardless of whether one views the bias towards increasing time on the market, or the perceptions of demand vs supply”.
The 3rd and 4th quarter 2020 surveys, which were subsequent to the COVID-19 ‘‘hard lockdown’’ of the 2nd quarter, did show a mildly smaller bias by brokers towards ‘‘oversupply’’ in the buying-selling markets of the Industrial and Retail Property Markets, he says.
“However, this was not the case in the Office Property Market, where the ‘‘oversupplied’’ bias continued to become stronger. But all 3 markets have a strong oversupplied market: bias, and this appears reflective of the deep economic recession in which South Africa’s economy has found itself in.
Further -9% decline predicted
“The oversupplied market leads us to continue to expect a decline in average property values to continue in 2021. After a predicted -7% decline in average capital value in 2020, our forecast for 2021 has been a further -9% decline.”
Loos says the oversupply comes as little surprise, given that the economy had been stagnating over many years prior to COVID-19, and then saw a massive -17.48% year on-year contraction in Real GDP (Gross Domestic Product) in the 2nd quarter, followed by a further year-on-year decline of -6.04% in the 3rd quarter.
“That is almost undoubtedly an economic environment driving weak demand and strong supply of property on the market, and the broker survey continues to reflect this.
Loos says there is little indication that these market perceptions will change anytime soon, despite Retail having been the ‘‘weakest link’’ in 2020.
Why the possible ‘switch’?
“Retail experienced the worst of the April/May hard lockdowns, and was the property class losing the most income in the 1st half of 2020 as a result.
Loos adds that the forced remote working ‘‘experiment’’ was highly successful, with recent quarters’ broker surveys pointing to many companies re-assessing their office space needs, and many planning to lessen their amount of office space leased or owned.
“This process may well be gathering momentum in 2021. It is thus looking increasing likely that Office Property will be the underperformer of the 3 main commercial property classes in 2021.”