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An uphill battle for the industry

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This week’s Level 4 easing of the lockdown conditions should slowly start the recovery of the economy, but will not do much to help the ailing commercial property industry.

The retail, office, hospitality and manufacturing markets, like most others, have ground to a halt with property owners and tenants fighting for personal and business financial survival.

Furthermore, as alert levels can change at any moment, dependent on the virus risk, the uncertainty can be crippling for businesses. Before the onset of coronavirus, the economy was under pressure and in recession.

Commercial property tenants were not in a strong enough financial position to weather the pandemic that would come, says John Loos, commercial economist at FNB.

As a result, this sector was already “correcting”. Even if, by some miracle, South Africa had zero coronavirus cases, the probable deep recession affecting the big economies of the world, particularly the US, would have put the country into a deeper recession than it was in already.

“I think we are going to witness this in the mining and manufacturing sectors, which will start to scale up production after the lockdown but will probably find things extremely tough going on the exports side,” says Loos.

Although the risk-based model is an easing of the lockdown which can improve the opening of the economy, Jack Bass, director of Lew Geffen Sotheby’s commercial franchise in Cape Town, believes it can also shut it down again. He says this volatility hampers the decision-making process unless businesses are essential or allowed to open at Level 4.

“With no planning horizon from day to day, an investment decision to relocate business premises (lease or buy) or, worse still, to start up, is a major risk. The upside risk must now far outweigh either investing in a fit-out or an acquisition. The hurdle rates and IRRs (internal rates of return) would have to be excessively beneficial.”

He says the pandemic is forcing owners to relook at the fundamentals of their businesses and their operating models. This would cause the digital shift to happen faster, thus releasing volumes of lettable spaces as people work remotely.

“In our company, of the 23 transactions pending the week before lockdown, 19 were suspended, with the majority stating they will revert once the lockdown has ended. That begs the questions: When will it end and at what stage does the government believe the population has developed sufficient immunity?”

The government stimulus packages are all the authorities could offer, with the resources they have, but they are still not enough to bring about a solid commercial property sector any time soon, Loos says.

While easing lockdown restrictions will help, the financial shock to much of the tenant population from this recession won’t realistically be reversed in a hurry. 

“Sadly, I think we’ll find a portion of the more fragile tenants won’t survive this and a significant portion will need a lengthy nursing back to financial health.” The recovery process could take years, he says.

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