Near Term Market Activity Expectations
The FNB Commercial Property Broker Survey surveys a sample of commercial property brokers in and around the 6 major metros of South Africa, namely, 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, but a portion will also have dealings in the developer or investor markets as well as in the listed sector.
This report discusses the survey component where respondents are asked to provide their expectations of sales activity levels in the 6 months ahead of the survey. The question asks whether the respondents anticipate a decline, increase or no change in activity levels compared in the 6 months ahead.
From these results we compile an index, allocating a score of +1 to each percentage points’ worth of “increase” responses, zero to that of “unchanged” responses and -1 for that of “decrease” responses. The index is thus on a scale of +100 to -100.
The 4th quarter 2021 survey, which effectively reflects broker expectations looking into 2022, shows the respondents as a group most optimistic about Industrial Property Market Activity’s direction in the near term, returning a positive reading to the tune of +25.
Quite interesting, though, is that the optimism level in the Office Property Market near-term direction has improved quite significantly to record a positive reading of +23.73, up from the prior quarter’s +6.67. This implies that 23.73 percentage points more of the brokers expect strengthening in sales activity in this market compared with those expecting a decline. The brokers as a group are least optimistic about the Retail Market, which also has a positive reading, but significantly lower that of the other 2 markets to the tune of +7.69.
Effects of COVID-19 remain drivers of Brokers’ Expectations, but interest rate hiking has recently emerged as another key one.
The open-ended follow-up question to the brokers, after asking them for the expected direction in sales activity, allows them to list the factors that influence their thinking around future market direction. While the brokers as a group are mildly biased towards “strengthening sales activity direction”, there remains a significant amount of negativity regarding the state of the economy and the impacts of Covid-19 disruptions, while interest rate hiking has risen in prominence as a key factor lately.
• The Office Market –Work from home impact on office space downscaling is still significant, but diminished in importance.
In the 4th quarter 2021 survey, the Office Property component showed 54.23% of respondents citing some form of “Effect of Covid-19” as a key factor driving their activity expectations.
Looking at the sub-components of this key factor is perhaps more insightful though. A still-very significant 25.42% of brokers perceive companies to be re-evaluating their office space needs, and in many instances downscaling on office space, thus a key factor influencing their near-term expectations of market activity in this segment.
It must be said, however, that this percentage is noticeably lower than the prior quarter’s 36.67%, and has been declining for a few quarters. This decline may be a result of a larger portion of the workforce returning to the office in recent times, and perhaps a perception amongst brokers that a large portion of the downscaling of office space requirements by businesses has been completed.
The “Work from Home (WFH)” surge during the Covid-19 lockdown period features prominently in these space requirements revisions. However, job losses in the Finance, Real Estate and Business Services Sector may have also played a significant role.
Then, slowly emerging as a new concern has been “interest rates, cited by 32.2% of brokers as a key factor, and the overwhelming majority point towards the expectation of interest rate hiking.
A further noticeable factor cited was that of “Stock Issues”, which was mentioned by 15.25%. The majority point to oversupply on the market.
• The Industrial and Warehouse Market –Popularity due to relative affordability and greater logistics for online retail.
In the relatively strong Industrial and Warehouse Property Market, “Stock issues” were the major factor, with 26.47% of survey respondents pointing to this, the overwhelming majority indicating stock shortages.
The category of motives known as “Changing Trading Conditions” is 2nd in importance, with 23.53% of respondents pointing to factors within this category as an issue. The largest portion of respondents here points in effect to the benefits of Industrial Property being the most affordable property class, claiming investors to still be finding value here while also being appealing to small businesses. A further significant factor cited under this category is the emergence of a greater level of online retail, driving increased logistics and warehousing demand.
Interest rate-hiking has emerged as a key factor, generally seen as a key negative for activity levels in this market, with 19.12% of respondents citing this factor as an issue in their thinking about future sales activity.
Thereafter comes the category “Economic and Political Uncertainty”, with 17.65% of respondents citing this factor as a key potential negative influence on sales activity. But not all respondents are expecting the economy to play a negative role, with a smaller but still significant 13.24% pointing to “Positive Business Sentiment”.
• The Retail Property Market – Online retail slowly becoming a more significant issue.
The Retail Property Sector has arguably been the one most directly impacted by Covid-19 lockdown, many retail outlets losing all or a major part of their revenues during those harder lockdowns of 2020. This sector’s tenant population also appears to have been experiencing the most difficulty in recovering financially, if one views their weak rental payment performance according to TPN data.
Not surprisingly, therefore, brokers still see the impacts of Covid-19 as a very significant factor influencing their near-term thinking regarding sales activity.
30.77% of respondents point to factors relating to Covid-19 impact as still lingering. These factors include greater preference for smaller centres with car park facing shops and open air, a negative economic impact from the pandemic lockdowns, a very weak market as a result, and some investors playing a “wait and see” game to see where the pandemic takes us in future.
Interestingly, very few respondents in this category (3.85%) point to rising interest rate as a key negative issue. They are heavily focused on the weak economy, 19.23% of respondents citing “Economic and Political Uncertainty” as a key issue against only 5.77% pointing to the prevalence of “Positive Business Sentiment”. 15.38% point to “Pricing” as a key issue, the biggest group here still pointing to sellers asking unrealistically high prices. 13.46% point to stock issues, interestingly, with a bigger portion perceiving stock shortages as opposed to surpluses.
And, of course, there is the matter of Online Retail as a challenge to centre footfall and sales. Within the 2 major categories of “Difficult Trading Conditions and “Changing Trading Conditions”, a total of 13.47% of respondents point to online retail as a challenge to retail property. This is not yet a major issue in brokers’ thinking, but it has gradually been becoming more significant.
The 4th quarter 2021 FNB Property Broker Survey showed improved optimism with regard to near term property sales activity in 2 of the 3 property classes, i.e., Office and Industrial, compared with the prior quarter’s expectations survey response.
The respondents in the Retail Property Sector, however, were less optimistic as a group than the prior quarter’s respondents, suggesting that the post-hard lockdown recovery in the Retail Property Market may be running out of steam.
In the Office Market, one shouldn’t get too carried away just yet with a significant bias towards a strengthening market in the near term. This market does come off the lowest base when it comes to activity levels, being by far the weakest market of the 3 major commercial property markets in recent times.
However, the brokers appear to perceive companies planning to downsize on office space, in big part a function of greater levels of remote working, as tapering in importance of late.
In the Industrial Property Market, greater affordability is implicitly seen as a benefit over the other classes, while greater online retail requiring greater warehousing and logistics space is also a key supporting factor in broker expectations of market activity here.
In the Retail Property Market, the impacts of Covid-19 are still seen as a key factor, while the online retail challenge to physical retail is gradually being seen as more significant. Across the 3 sectors, “Economic and Political Uncertainty” continues to be a key negative factor for sales activity, while interest rate hiking has become perceived as a more significant issue of late.
READ MORE: 4th quarter 2021 FNB Property Broker Survey