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Commercial property trends for 2019

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Analyst raises spectre of loans from the International Monetary Fund

The business wheels of 2019 have started turning but commercial property owners should not anticipate great returns.

The South African economy is still in the doldrums and Erwin Rode of Rode & Associates believes further ratings-agency downgrades are “written in the stars”. 

The country will then “have to go cap in hand” to the International Monetary Fund for a bailout.

“This in turn will force frugality on the South African consumer and taxpayer, and frugal living would include higher interest rates. Higher interest rates will mean it would be more difficult to finance property purchases.”

Furthermore, Rode says one should not expect too much growth in the market rentals of commercial and industrial properties. Another year of single-digit total returns on all commercial property is expected, says FNB property economist John Loos.

“The total returns figure for 2017 from the Investment Property Databank (IPD) was 10.9%, but a 2018 half-yearly return of 4.7% suggests that 2018 may have dropped into single-digits. “I expect 2019 to remain in single digits.” Loos also predicts a further increase in overall commercial property vacancy rates. 

“Despite building confidence surveys suggesting that creation of new commercial space in 2019 will be very weak, my feeling is that it will not yet be enough to curb supply sufficiently as to stop the rise in the All Property vacancy rate…”

He feels all three major commercial segments – industrial, retail and office – will perform similarly this year to their 2018 levels, which is real value decline and single-digit total returns. The online challenge to retail “plays into the hands” of the warehousing sector, but Loos says he would not get too excited. 

“Certain specialist warehousing can benefit from online retail development, but warehousing performance depends on the over all economic performance. While online retail can grab a larger slice of the overall retail pie in 2019, weak economic growth is expected to mean weak overall consumer spend and retail sales growth.” Regionally, Loos expects the Western Cape to be the outperformer this year.

Flexible working environments will further impact on demand for office space. Picture: Supplied

“The Western Cape appears to have seen the least ‘overbuilding’ if one looks at IPD half-yearly vacancy rates. The province had the lowest vacancy rates between itself, Gauteng and KwaZulu-Natal in the area of office and retail.

“It is only bettered by KZN in industrial vacancies… I think all three markets have slowed, and the Western Cape office and retail vacancies may also show some rise. But it seems KZN and Gauteng’s increases in retail and office vacancies are ahead in the rising cycle.”

In central Cape Town, says Chad Shapiro, commercial specialist for Lew Geffen Sotheby’s International Realty on the Atlantic Seaboard and in the City Bowl, commercial property is still trading well. But with a retail decline due to the growth of online shopping surging so dramatically, he feels on-street boutique-type retail venues are going to be favoured over shopping centres.

“This makes the overall demand for retail space in central areas more prolific.”

Generally though, he adds: “I think the market in Cape Town is stabilising and, with property prices coming down in general, landlords are reducing rents to cater for this. Competitive pricing will be key in the year ahead.”

Outlook for 2019 bleak

Retail: Given Eskom’s financial woes and mounting debt levels, FNB’s John Loos believes there is a “real chance” it will be granted significant tariff increases in 2019. “This impacts most heavily on retail space operating costs – a further negative for retail.”

Office: Loos says office space is still likely to be the underperformer of the three major commercial segments. “Office space also has significant technological challenges as more companies are becoming more flexible in terms of whether staff work from home or office. In many cases, this is lowering the need for office space.”

Industrial: Weak retail sales are likely to mean weak manufacturing growth, so Loos does not expect major growth in demand for industrial space. Nevertheless, industrial and warehouse space will marginally outperform other segments, he believes.

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