Office and industrial property industry playing from the rough

The South African industrial and retail property market has weakened further in the aftermath of the Covid‐19 lockdown, reflected in the roughly 50% decline in listed property prices on the JSE from January to end September.

The pandemic has caused consumers to turn to online shopping, which is bad for malls but positive for distribution centres and the work‐from‐home trend, which is negative for office property.

However, according to the Rode Report for the third quarter of 2020 from Rode & Associates, segments such as logistics and shopping centres in communities, neighbourhoods, and low‐income areas have proven rather resilient.

Company financial results up to June 2020 indicate sharply falling or zero distributions, downward rental reversions, rental remissions, higher operating expenses, rising vacancies, sharply decreasing property valuations and consequent higher loan‐to‐value ratios.

Office market

The office market is battling due to increasing oversupply, with vacancy rates last seen in 2003. More companies are closing down, shrinking in size, or delaying expansion.

Rental growth for grade‐A decentralized office space declined by 2% nationally compared to last year, after still growing by 1% in the second quarter.

These rentals decreased by 3% in Johannesburg and about 2% in both Cape Town and Pretoria compared to the third quarter of 2019, while remaining roughly the same in Durban. Serious negative rental reversions on lease renewals are expected.

Work‐from‐home trend

How sustainable is this trend and what will the impact be?

According to the Rode Report, the simple answer is that the percentage of the labour force working from home will be higher after the pandemic is over than before it started. Surveys conducted in the US and South Africa show that most workers want to return to the office permanently.

Industrial market

The industrial market is also suffering, with rentals failing to grow in the third quarter. Rode’s survey conducted for the report show that national industrial rentals were unchanged compared to the third quarter of 2019, but fell by 1% compared to the second quarter as vacancy rates continue to increase.

However, this market still appears to be doing better than the office and retail property markets.

The report shows that nominal rentals for prime industrial space of 500 m² fell by 4% year on year in the Central Witwatersrand, which had the worst performance of the major centres.

Rental levels stayed roughly the same on the East Rand and the Cape Peninsula and even grew by 2% in Durban. Rentals in all major regions that Rode tracks have declined in real terms.

The weaker rental performance indicates that the industrial market is also experiencing the impact of the very weak economy. Industrial rentals are suffering largely due to the worsening performance of the manufacturing and retail sectors.

The good news is that the manufacturing sector recovered some lost ground after lockdown regulations were eased after it collapsed in April, with production for the three months to July 2020 down “only” 3,9% according to Stats SA on a seasonally adjusted basis compared to the three months to April 2020. Production in July grew by almost 8% compared to June.

However, looking at the bigger picture, manufacturing production fell by 17% in the first seven months of 2020 compared to the same period in 2019, according to StatsSA, after production fell by about 1% in 2019.

“No doubt, recovering all the lost output will take some time. The outlook for the sector is very bleak due to poor global and domestic demand, largely stemming from Covid‐19, while potential production gains in the future could be limited by electricity supply disruptions – not to mention the ever-growing debt burden of the state,” says Kobus Lamprecht, editor of the Rode Report.

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