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Rents to tumble post pandemic

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The struggling economy and Covid-19 will influence commercial property investments in the long term

The commercial property world that will emerge after lockdown will be somewhat different from the one that went into it and investors will need to be aware of the new reality which they are facing.

Andrew Jefferson, a director of Annenberg Property Group, says from an investor perspective property is still a long-term investment and so decisions will be made based on the new future. And the probability of reduced rents is a consideration.

The decision to acquire a commercial property investment should always begin with the bricks-and-mortar price, and while a lease might be for a few years, rents will always revert to market in the long run. Investors need to understand current market-related levels before deciding to buy.

“Rental rates will drop post the Covid-19 lockdown. In a rental market controlled by supply and demand, when supply increases and demand decreases, the price has to capitulate. Companies will revise their growth plans, look to consolidate or look to move. Many businesses will cease to exist in the medium term, even if they do survive for the next few months. “Tenants will be forced to move, even if they are in the middle of a lease, and vacancies will rise.”

This high vacancy level in the commercial sector will create competition among landlords, and Jefferson adds this will mean a drop in rents.

“We have already seen how the listed sector has reduced rental levels significantly to retain tenants in good standing.” The levels of decline will also be worse in certain areas.

“We have always seen the strength of the commercial market like the ocean tide – as the market strengthens, the high tide pushes demand into secondary areas as core areas have few vacancies and prices become unaffordable. As the tide weakens, that demand results in the opposite – rising vacancies are first filled in the core areas, leaving secondary areas vulnerable to high vacancy rates.

“This means that rental levels will see a bigger drop in outlying areas than in primary areas, which comes back to the ever-critical importance of location.”

The national office market vacancy rate in the first quarter of this year was 11.6%, according to the South African Property Owners Association (Sapoa). This is a 0.6% increase from the previous quarter. Of further concern is that this weakening is likely to be purely a result of the fragile economic environment and not Covid-19.

“The impact of the pandemic will likely take several quarters to filter through into the office sector’s vacancy rate as leases come up for renewal in the quarters following the lockdown. During the first quarter (January to March) asking rental growth remained well below inflation and declined to 0.7% from 2.5% in December.”

Occupancy rates during this period softened across all office grades, the report notes. Of the country’s five largest metros, the City of Cape Town still had the lowest overall office vacancy rates at 8%. But this is up from the 7.3% as at December due to “notable increases” in Century City and the CBD.

The eThekwini metro recorded the highest rate in Q1, with 13.7%. A slowing capital growth trend, into negative territory by last year, has been in play in recent years and the Covid-19 crisis is likely to add momentum to this correcting trend this year, says FNB commercial property economist John Loos.

The economy is expected to contract sharply by 4.5%, on the back of domestic shut downs and severe global recession, and the average vacancy rate expected to rise more sharply.

This, he says, will place downward pressure on rents and upward pressure on cap rates. Loos says there will be “more significant” negative capital growth this year than was seen last year.

How much is empty where

Office vacancy rates in eThekwini commercial nodes:

◆CBD: 19.9%

◆Hillcrest/Gillitts: 11%

◆Berea: 10.8%

◆Ballito: 9.9%

◆Umhlanga/La Lucia: 8.1%

◆Westville: 6.5% 

Source: Sapoa Office Vacancy Report Q1 2020 H

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