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Monday Nov 30, 2020

Commercial property values set to keep falling

South Africa's economy is expected to return to positive growth in 2021, but commercial property values are expected to continue to devalue as the market catches up with the impact of the recession.

But it's not all doom and gloom as some demand in the industrial segment of the property market remains strong, especially in KwaZulu-Natal and the Western Cape, while the Covid-19 "Zoom Boom", which led to more people working from home, could raise higher income household demand for larger residential properties and "semigration" to the coast. Another interest rate cut in 2021 may also fuel the residential buying market.

These were among the insights FNB property strategist John Loos highlighted during a recent presentation on the 2021 Property Market Outlook.

Loos said the economy was expected to return to positive GDP growth of about 3.3% in 2021 after hitting a contraction of -8% in 2020.

However, he said the commercial property market would continue to experience rental deflation and "ongoing property value correction", with the average value decline projected to be -9% in 2021 following an estimated -7% drop in 2020.

Loos said industrial property had relatively outperformed other market segments.

"All three major commercial property sectors, namely retail, office and industrial, are expected to remain under pressure in 2021, but with the more affordable industrial property sector being the best performer of the weak bunch," Loos said.

"We see retail and office property being under significantly greater pressure than industrial property, with retail property having to deal with the emerging online retail trend, but more importantly with a consumer weak on finance and weak on confidence."

He said the remote work trend and weak services sector employment were also expected to lead to downscaling in office space demand which was already dampened before lockdown.

"We would guard against expecting the remote-work trend to accelerate too rapidly, with many corporates still having offices and infrastructure in place for the time being. But we believe it has a bigger future in the coming years, and this raises many questions as to how people will choose to live," Loos said.

He said 2021 would provide clarity on the "Zoom Boom" work from home trend, but it remained to be seen whether there would be a big market for more upmarket high-density residential property in decentralised nodes like Sandton.

"Some higher-income households may repurpose homes in order to make them more suitable for work purposes, or alternatively some may "buy bigger".

Semigration to coastal regions could receive a mild boost, supporting residential developments in regions such as the KZN North Coast. But we would caution expecting too much movement in such a tough economic and financial environment," Loos said.

Loos said low interest rates might keep the residential buying market more buoyant, with many first-time buyers taking advantage of the opportunity, leaving a hole in the residential market which would be "in the doldrums" facing price deflation in 2021.

"With FNB forecasting a further 25 basis point interest rate cut early next year, we expect the residential buying market to remain more buoyant than commercial property in 2021. Home buying is tied to a strong culture of ownership. This is different to the commercial property side of the market, where buying versus renting is more about what makes business sense," he said.

FNB Commercial Property Finance chief executive Preggie Pillay said 43% of the bank's R31 billion book of unlisted commercial property had received Covid-19 relief, predominantly regarding interest on capital.

"Out of the 43% our total arrears book is less than 1%," Pillay said.

He added that there were "lots of people with lots of money" looking to buy property and there were opportunities for growth in the student accommodation sector and at the lower end of the residential market. He said there were also opportunities for growth in the industrial segment and in rural shopping centres which had reported increased foot traffic and spend during lockdown.

The Mercury 30 Nov 2020 LYSE COMINS


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