Commercial property market taking a further knock, as predicted at start of technical recession
When South Africa officially entered into a technical recession at the beginning of September, the outlook for commercial property was bleak.
The sector was already struggling in the tough economic conditions, but once the country entered recession, the predictions were that office vacancies would rise further and rentals would drop even more.
Less consumer spending would also put added pressure on retailers and see retail rentals forced to drop, experts predicted.
So far, the situation has unfolded just as the experts said it would.
“The commercial property market, like the economy generally, has been constrained on the back of a number of factors, including the news of the technical recession,” says Broll Property Group’s divisional director Frank Reardon.
Additional anxiety around land expropriation without compensation, the tough retail environment, fuel prices and global economic uncertainty has added to the general economic woes, he says.
“The performance of the listed property sector is sharply down for the year in line with the economy. Indications are there is some light at the end of the tunnel, including credit agencies talking of an improved ratings outlook and August retail sales seemingly bouncing back.
“Anecdotally there appears to be somewhat more commercial property investment and leasing activity. However, if sustained, the good news will take time to filter back into the development landscape.”
As expected, the retail property sector has suffered due to poor retail performance and the recession, Reardon says, adding that the industrial property market has been the strongest performer in line with international trends.
Along with the retail sector, he says the office sector has also been hard hit by the current economic climate.
Office tenancy in the City Bowl and Atlantic Seaboard has “dropped slightly” since last year’s summer season, which Chad Shapiro, Lew Geffen Sotheby’s International Realty’s commercial property specialist in these areas, says is not unexpected considering the subdued economic climate.
“However, although the commercial property sector will always wax and wane it will always trade as office and retail locations are a pre-requisite for conducting business.”
Furthermore, Cape Town “will always have different performance characteristics” to other areas as there is naturally a high spend augmented by foreign investment in the Western Cape.
“Property owners looking for top dollar for their buildings may find it hard, but the leasing model will remain constant, keeping building owners with long term benefits to look forward to.”
In the southern suburbs, the market is also reflecting the state of the economy, say Jack Bass and Robert Odendaal, commercial property specialists for Lew Geffen Sotheby’s International Realty. The rentals sector in particular, has softened.
“There has been a notable increase in vacancies since the second quarter. This is being exacerbated by the fact that landlords are not relaxing their rental expectations,” Bass says.
Yet while the retail sector remains under significant pressure, vacancies are generally still low, Odendaal says.
“However, we are noting some industrial nodes and office spaces are now showing lower uptake of vacancies with many good sites sitting vacant for months. Leasing deals are also being negotiated more aggressively.”
Overall, it just has not been a great year for commercial property in South Africa, Reardon says.
“Interest in investment in the commercial property sector definitely saw a decline in 2018 on the back of the recession and expropriation without compensation.”