According to John Loos, Property Sector Strategist at FNB Commercial Property Finance, the lack of direction in the market arguably reflects rising interest rates and recent renewed economic pressure.
“The industrial and retail markets are showing declines in market sales activity ratings, with only the office property market’s activity rating rising slightly after the prior quarter’s decline,” says Loos.
“The percentage of broker respondents perceiving business conditions to be satisfactory declined significantly in the third quarter survey - from 46% in the prior quarter to 33% this quarter. This is the second consecutive quarter of decline, arguably reflecting renewed economic pressure accompanying recent interest rate hiking.
“When asking brokers for their ratings of market activity levels on a scale of 1 to 10, the group of survey respondents is still most upbeat about the industrial and warehouse property market. However, the industrial property market’s third-quarter 2022 activity rating declined to 5.92 from a multi-year high of 6.35 in the prior quarter.
“The retail property sales activity rating declined slightly from 4.60 to 4.56 over the same two quarters. The office property market activity rating remained the weakest of the through, although it actually increased from 3.72 in the previous quarter to 3.99 in the third quarter.”
Interest rates
Loos says that the increasing interest rates may have begun to dampen the buying and investment market.
“Until early in 2022, sales activity ratings had been on a rising trend in all three property classes following the easing of Covid-19 lockdowns. This rising trend started to run out of steam, according to the second quarter 2022 survey.
“We believe the key influence in the recent lack of clear further strengthening in all three major commercial property classes has been the global and domestic inflation spikes that brought about the onset of interest rate hiking in South Africa and the rest of the world from late 2021.”
To date, the South African Reserve Bank (SARB) has hiked interest rates by 200 basis points, and FNB expects a further 50 basis point increase in the repo rate at the next Monetary Policy Committee (MPC) meeting in November.
Sentiment
The FNB Commercial Property Broker Survey surveys a sample of commercial property brokers in and around the six major metros of South Africa - City of Joburg and Ekurhuleni (Greater Johannesburg), Tshwane, eThekwini, City of Cape Town and Nelson Mandela Bay.
Given FNB Commercial Property Finance’s strong focus on the ‘owner-serviced’ market, a pre-requisite in selecting broker respondents is that they at least deal in owner-serviced properties, although some also have dealings in the developer or investor markets and the listed sector.
In the survey for the third quarter of 2022, the percentage of respondents experiencing conditions as satisfactory was significantly lower than in the previous quarter - declining to 33% from an earlier 46% reading.
This is the second successive quarter of weakening, which has become more pronounced in the latest survey after very significant increases in this percentage in earlier quarters. It suggests that post-2020 lockdown broker confidence improvements have run out of steam, and at this level implies that the majority - 67% - of respondents are dissatisfied with conditions.
The survey shows that business confidence in the commercial property sector appears more or less in line with recent business confidence levels for the broader economy, which has also weakened in the past few quarters.
The RMB-BER Business Confidence Index for the third quarter of 2022 showed a similar 39% of survey respondents across the economy expressing satisfaction with business conditions - a weakening from the 42 reading for the previous quarter.
Sectors
The brokers surveyed remain most upbeat about the industrial and warehouse property market, in spite of this market’s third-quarter 2022 activity rating decline from the second quarter.
The retail property activity rating declined slightly for the second successive quarter, and the office property market activity rating remained the weakest of the three property classes despite a slight increase in the third quarter. However, this latest activity rating was still down on the 4.26 multi-year high of the first quarter of 2022.
Industrial
Loos says a feature of the third quarter survey was that the industrial property market sales activity rating yet again recorded the highest reading of the three major commercial property categories, despite its mild decline.
“We had recently begun to expect some likely slowing in this property category’s sales activity. It is not seeing strong economy-related support from the related manufacturing sector. Real manufacturing Gross Value Added (GVA) has been in recent contraction, declining year-on-year by -3.77% in the second quarter of 2022,” says Loos.
“In addition, a slowing economy, in general, constrains any meaningful growth in overall inventory levels, thus containing demand growth for warehouse space. However, relative to the other two property classes, industrial property is still believed to be benefiting from being the most affordable and adaptable property class in tough financial times. Another factor is the increasing need from a portion of retailers for logistics and warehousing due to greater levels of online retail.”
Retail and office
Compared to the industrial market, retail and office activity ratings remain significantly lower.
Loos says these two categories have not yet achieved a rating higher than their pre-Covid 19 lockdown readings for the first quarter of 2020.
“Retail is still constrained by financially pressured consumers and weak retail sales growth, which recently went back into year-on-year real decline to the tune of -2.5% in June 2022,” he says.
“The office market is being challenged by weak levels of employment growth in the finance, real estate and business services sector, which is usually a key driver of demand for office space. Growth in the sector slowed year-on-year to 0.47% early in 2022 after some mild post-lockdown rebound.
“In addition, more employees are working remotely, and improved management of surplus desk space compared with the pre-lockdown era constrains demand for office space. Altogether, these factors are keeping this property category the weakest of the three.
Impact
The series of SARB interest rate hikes that started late in 2021 has significantly affected all three property classes, says Loos.
“These may have begun to take their toll on property buyer demand in all three property classes in recent times if the fact that all three categories are off their multi-year activity rating highs is anything to go by.
“The follow-up question to brokers regarding the activity trend over the past six months does not yet show convincing signs of a weakening perception. However, in the most recent survey sample of brokers, we believe the interest rate hiking since late last year has likely influenced the start of the dampening of market spirits.
“Broker business confidence had been improving until early in 2022, arguably driven by a sense that the Covid-19 threat was receding, lockdowns were being further relaxed and economic life was getting back to normal. However, in the most recent survey, broker business confidence dropped quite sharply. This is not surprising, given that some more recent economic headwinds have been building.”
Although commercial property demand is arguably less sensitive to interest rate hiking than residential property, there comes a point where those hikes do begin to have an impact. Loos believes that point may have been reached with the latest interest rate hikes in the current cycle and expects further hikes before the end of 2022.
Writer : Sarah-Jane Meyer