L E A DERSHIP INSIGH T S
An industry check-up Industry leaders share their market outlook for the commercial property sector. By GARETH GRIFFITHS
Our business leaders believe the work from home novelty will wear off by year end.
Vacancy rates are expected to reach double digits this year according to FNB economist, John Loos.
Vacancy rates - climbing? Norman Raad, CEO of Broll Auctions and Sales, believes that the commercial property market was overvalued. “Vacancies have increased across the board and the property sector was already struggling as businesses started to consider consolidation, or were looking for smaller, cost-effective premises. Since the (COVID-19) pandemic, some businesses have not reopened, making it difficult to calculate increases in vacancies. “The pandemic has brought forward the correction to an overvalued commercial sector, I believe. The disparity between new developments and existing properties has increased drastically, slowing the demand for new developments. Commercial offices were already experiencing massive reversions and increased vacancies before the pandemic. The pandemic has just exacerbated it,” says Raad. John Loos, an economist for Commercial Property Finance at FNB agrees that it is too early to calculate vacancy rates: “We don’t have data released that can show the extent of the impact of recent lockdowns, and the massive likely drop in GDP in the second quarter, on the commercial property sector.” Norman Raad
“The pandemic has brought forward the correction to an overvalued commercial sector.” – Norman Raad,
CEO Broll Auctions and Sales
Loos expects vacancy rates to reach double-digits this year, on the back of a sharp GDP contraction forecast of 8 per cent for 2020 as a whole. “In addition, the MSCI All Property Vacancy Rate recorded 6.7 per cent last year and rose in 2018 and 2019 due to the multi-year economic growth stagnation.” Estienne de Klerk, the CEO of Growthpoint, one of South Africa’s largest real estate investment trusts (REITs), adds that the country entered the COVID-19 pandemic with a surplus of commercial property space in the market. However, he sees a possible silver lining to the clouds for a sector John that he believes has come Loos through the initial shock of
COVID-19 in a structurally sound manner for its entire value chain, playing a pivotal role in supporting vulnerable small businesses and protecting jobs. Will the working from home lockdown phenomenon affect occupancies on an ongoing basis, creating further vacancies? Despite its initial appeal, Rob Kane, the CEO of Boxwood Property Fund believes that the novelty of working from home is wearing off. “City centres have been around for many thousands of years and it is unlikely that the pandemic will destroy peoples’ need to congregate to do business. We estimate that by year end, people will have learned to live with the presence of COVID-19 and business will continue,” he adds.
Rental growth pressures Loos believes there is a sure recipe for full-blown rental value decline. “Rode’s national prime industrial rental inflation y/y was at +0.7 per cent, by the second quarter, while national decentralised A-grade office rentals were already in slight deflation of -0.7 per cent. These saw significant declines in prior quarters. ›
DID YOU KNOW?
As an alternative to commercial lenders, developers have sought funding from Development Finance Institutions (DFI’S), who tend to have a different risk appetite than commercial banks. While commercial banks prefer to fund post completion – effectively “taking out” any development risk - DFI’s have been willing to look at development opportunities that have a social as well as a financial impact. Source: JLL, Hotel Devt Outlook, 202.
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