South Africa’s work from home ‘experiment’ could break this one sector in 2021

Data from FNB’s latest Commercial Property Broker Survey points to a market in distress.

Splitting the survey into three main commercial property classes – namely office, industrial and retail – brokers surveyed by FNB perceive the industrial property market to be the strongest of the three.

This is with an average time on the market for occupied industrial properties of 23.26 weeks – quicker than the 25.07 weeks in the case of retail, and 25.86 weeks for office space.

All three property sectors have the majority of respondents pointing to ‘supply exceeding demand’, either ‘somewhat’ or ‘far’. The industrial market possesses the lowest percentage of respondents, i.e. 74% perceiving supply to exceed demand, whereas 80% perceive supply to exceed demand in retail property and 95% in the case of the office property.

Examining the perceived market balance by major metro region, the office space survey points to Greater Johannesburg having the weakest demand vs supply balance, with its index being the most negative -180.5. This reading is noticeably weaker than the other four metro regions, which are all in a tight range between -142 (Tshwane and Cape Town) and -150 (Mandela Bay), FNB said.

In the industrial property market survey, the three coastal metros come out relatively stronger than the Gauteng Metros, with Nelson Mandela Bay having a positive reading of +49, followed by Cape Town with -5 and Ethekwini with -14.

At the weakest end of the industrial property market is Greater Johannesburg, with a negative index reading of -137.5, followed by Tshwane with -87.

In the area of retail property, the survey points to significant oversupply across all five metro regions.

The oversupply comes as little surprise, FNB said, given that the economy had been stagnating over many years prior to Covid-19, and then saw a massive -17.48% year- on-year contraction in Real GDP in the second quarter, followed by a further year-on-year decline of -6.04% in the third quarter.

“That is almost undoubtedly an economic environment driving weak demand and strong supply of property on the market, and the broker survey continues to reflect this.”

The office property market appears to have surpassed the retail property market in terms of being perceived by the brokers as the weakest of the three major markets, FNB said.

This suggests that Office Property may be the weakest of the 3 major property classes in 2021, whereas in 2020 it was more the retail market that appeared to be the weakest link.

Why the possible switch? Retail experienced the worst of the April/May hard lockdowns, and was the property class losing the most income in the first half of 2020 as a result, said FNB.

While office workers were largely sent to work at home during lockdown, many of the companies that they worked for were not locked down, so rent could still be paid to a far greater degree in the office market, and tenant income was far less negatively impacted.

But the office market had another looming problem, said FNB. “The forced remote working ‘experiment’ was highly successful, and recent quarters’ broker surveys point to many companies re-assessing their office space needs, and many planning to lessen their amount of office space leased or owned.

“This process may well be gathering momentum in 2021. It is thus looking increasing likely that office property will be the underperformer of the three main commercial property classes in 2021,” the lender said.

Read: Trends you should know about in South Africa’s residential property market – current and into 2021