Holding our FNB Commercial Property Finance Quarterly Briefing today, we focused on the key retail property themes currently and those expected in 2022.
The Retail Property Market of late appears to have been the “middle of the road” performer, sandwiched in between the underperforming Office Property Market and the outperforming Industrial Property Market.
It is important, when analyzing this property class’s prospects, to point out that it remains a relatively expensive property class by historic standards. Since the mid-1990s, it has seen very strong rental inflation, operating cost inflation and capital growth, to become expensive in every way compared to back then.
Using MSCI annual data, adjusting for general inflation in the economy to get to “real” values, real retail property net operating income (inflation adjusted using GDP inflation) had fallen by -20.9% from the peak 2015 level to 2020, while real capital value per square metre had fallen -18.8% over the same period. However, these real values in 2020 were still a massive 60.2% and 72.3% up respectively on 1995 levels.
Much of retail property’s meteoric rise in real rentals, income and values came during the consumer boom years prior to the Global Financial Crisis (GFC) recession of 2008/9. Interest rates had been reduced sharply from the late-1990s, consumers with far lower indebtedness levels back then went on a credit-driven spending spree, and economic growth was an almost unthinkable 5%+ in the years just preceding the GFC.
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The pre-GFC economic and consumer environment justified a sharp rise in real retail property rentals and values. It was the “darling” property class, as one would expect in a consumer boom.
However, after a post-GFC decade of economic growth stagnation and gradually rising financial pressure on consumers, this property class has been due for a significant correction in its values, in order to better reflect economic fundamentals.
And indeed, since around 2016, these values did start to broadly correct. In addition, of course, it faces the challenge of growing online retail.
It is important to mention this, because the longer-term big picture informs our thinking in a “post-lockdown” world. After a dramatic retail lockdown around the 2nd quarter of 2020, it was to be expected that the Retail Property Market’s performance would bounce back significantly off a very low base. But the bigger long-term picture arguably informs us on the “bounce back to what” question.
Almost all the important economic and other data related to the Retail Property Market point to a far better situation in 2021 compared to 2020, as one would expect. But the myriad of structural challenges that the South African economy faces suggest that we are returning to “mediocrity” at best, and indeed this is what many related economic numbers also tell us.
TPN tenant payment performance data tells us that retail property tenants were worse affected than the office and industrial tenant populations during the 2020 hard lockdowns, and despite having recovered to where 66% of tenants were in good standing with landlords regarding rental payments by July 2021, a massive improvement from 41% in May 2020, the level remained well below the 71% measured just prior to lockdowns commencing late in March of 2020.