- Commercial property consists of the main asset classes of offices, retail and industrial.
- Data shows that commercial property tenants are more financially pressured than before the Covid-19 pandemic, with about a third behind on their rent payments.
- In addition, new commercial mortgage loans granted declined by -24.31% year-on-year in the second quarter.
Commercial property tenants are more financially pressured than before the Covid-19 pandemic, with about a third behind on their rent payments.
Commercial property consists of three main property classes – offices, retail and industrial. Only 66.3% of commercial tenants were in good standing earlier this year compared to pre-lockdown levels, which often reached above 80%, according to data from credit bureau TPN.
On top of that, rising electricity and municipal costs have a negative impact.
“While landlords can, in theory, recover electricity and other costs from tenants, in practice, financially pressured tenants mean, in many cases, rentals that have to decline,” says John Loos, property sector strategist at FNB Commercial Property Finance.
Commercial property rentals declined in real terms (therefore taking inflation into account) by -8.3% since 2014, according to data from the analytics firm MSCI.
Loos expects the electricity crisis and above-inflation electricity tariff increases will contribute to a near-term decline in commercial property net operating income in real terms, as well as in real capital values. Net operating income declined in real terms by -19.9% since 2016.
Furthermore, new commercial mortgage loans granted declined by -24.31% year-on-year in the second quarter. Loos expects interest rate hikes and the global recessionary environment will cause an even further near-term decline.
The latest FNB Property Broker Survey shows sales in all three major commercial property classes being lower than early this year. Loos points out that lower GDP growth implies weaker business performance and confidence, which in turn constrains business expansions and new startups. This, in turn, dampens demand for commercial property space.
In his view, South Africa’s electricity supply and cost issues have become increasingly important for the country’s commercial property market. He even foresees that electricity promises to become a crucial source of municipal and regional competitive advantage – or disadvantage – as businesses increasingly search for regions where services are reliable.
Loos believes in the near term, this could lead to commercial property in the City of Cape Town showing “relative outperformance” because it often keeps load shedding at lower levels than the rest of the country through procuring power from independent sources to supplement Eskom.
The City of Johannesburg has also indicated it plans to secure alternative sources of power supply to improve reliability.