Tuesday, September 25

Recession will increase impact on commercial

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Vacancy rates will climb and property values will fall if the country’s economic pressures continue

South Africa’s struggling economy is already putting pressure on the commercial property sector, and if the current technical recession continues, the situation will undoubtedly worsen.

However, this does not mean there is not some light ahead, property experts say.

A recession is a significant decline in economic activity that goes on for a protracted period, such as a few quarters, says Absa property analyst Jacques du Toit.

The technical indicator of a recession – which has just occurred in the country – is generally two consecutive quarters of negative economic growth or a contraction in economic activity, as measured by a country’s gross domestic product.

Should South Africa suffer a continued decline over the next few quarters, there will be further pressure on office vacancies, which are already historically high, says Marc Edwards, chief executive of Tower Property Fund.

“As listed property companies are forced to reduce rentals to ensure space is filled, property values will decline.”

In Gauteng there is a large over-supply of office properties, and even though Cape Town has been the “most resilient” node, Edwards says commercial property values here have been dropping.

“Premises are taking longer to let than normal. That will become worse in a recession.”

Edwards says: “This is the most difficult trading environment we have been in for some time. Vacancies are rising, rentals are reducing, and if interest rates increase this will not be good for property.”

Most listed funds have fixed their interest rates, or at least a large portion of their rates, so are more protected than most private landlords.

“We believe private property prices will reduce, presenting strong opportunities for listed property companies to acquire correctly valued property in the short to medium term,” Edwards says.

If interest rates are increased, this will not be good for property. Picture: Pixabay

A recession will, however, add further negative sentiment, “stifle decision-making” and undermine spending patterns – and hence earnings – across different areas of the economy, says Frank Reardon, KwaZulu-Natal divisional director at Broll Property Group. This, he says, feeds into the commercial property sector in a number of ways including:

Less consumer spend puts retailers under pressure, which in turn puts downward pressure on shop rentals.

A slowdown in personal and corporate spend leads to fewer big property decisions from tenants and prospective buyers. This, coupled with companies opting for smaller spaces, puts downward pressure on office and industrial rentals and purchase prices.

“The impacts would, of course, depend on the length of the recession and other economic factors,” says Reardon.

The success rates of businesses throughout the country are already being affected by the negative economic conditions, and Chad Shapiro, senior commercial broker for Lew Geffen Sotheby’s International Realty, says commercial property rental costs are the first to be considered by companies downsizing.

Even if a continued recession is avoided, Reardon says decision-making will still err on the conservative side. This will possibly leave large capital-intensive decisions deferred until the economic and political climate creates greater certainty.

Shapiro says South Africa has been affected by the “tumultuous political climate and the resultant negative publicity”.

However, he believes that as the perception of the country improves so will business as a whole, and the commercial property sector will then strengthen.

Also on the positive side, the anxiety and uncertainty of the past few years has created a buyers’ market, Reardon says.

“Investors for the first time in many years have sellers both looking at selling commercial properties and becoming more realistic about pricing.”

Furthermore, Edwards says value in commercial property can be realised by investors who are positive about the future of South Africa.

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