Why the Western Cape will be the likely outlier of commercial property

Sharing office space will further reduce the need for office space in the years to come.

  • The Western Cape could be the likely outlier for short-term commercial real estate, according to FNB commercial real estate finance economist John Loos.
  • The reasons include relatively well-managed provincial and local governments without the “uncertainty of coalition politics”.
  • When it comes to commercial real estate in general, Loos says industrial property remains in the “pound-related seats”, while the office and hotel segments continue to underperform.

Provincially, the Western Cape could be the likely outlier for short-term commercial real estate, according to FNB commercial real estate finance economist John Loos.

“The Western Cape has been the most popular emigration destination for many years now, due to the province’s perception of having an exceptional lifestyle coupled with significant economic opportunity. It was also seen as an area where provincial and local governments are relatively and over time communication and information technologies have allowed businesses and individuals to move further away from Gauteng’s main economic center. Loos said during a webinar Thursday.

“More recently, unrest and looting in KwaZulu-Natal and Gauteng may have heightened the attractiveness of living and doing business in the Western Cape, a province that has largely escaped this event. Moreover, Cape Town is the only one of the six major metros that emerged from the recent local elections with its [governing] party with a clear majority, and therefore free from the uncertainty of coalition politics. “

While industrial property in South Africa still sits in the “pound relative seats”, the office and hotel segments of the commercial property market continue to underperform, according to Loos.

He believes that office and hotel real estate could see its face value fall further, while industrial real estate and, to a lesser extent, commercial real estate, should see little positive nominal capital growth.

MSCI data indicates a decrease in average valuations of commercial properties of around -9.5% from the second half of 2018 to the first half of 2021 and of -29% since the first half of 2016.

Mediocre at best

Loos cautions against “over-optimism” on industrial property, as inventory levels remain low and manufacturing is still “mediocre at best”.

“But industrial property is the most affordable and arguably the most adaptable class of commercial property, while also benefiting from the logistics industry being prepared for higher levels of online retail,” Loos said. .

As for hotels, he said income and occupancy rates remain well below pre-Covid-19 levels. He believes that while foreign tourists will return in greater numbers in 2022, it will not yet be at pre-lockdown levels. Plus, a lot of business interactions have likely been “zoomed in” all the time, and he expects some of the corporate business travel just won’t come back.

The hotel real estate market should therefore lag behind the three main categories of commercial real estate – retail, office and industrial – on the recovery.

When it comes to the struggling office market, Loos expects average vacancy rates to increase in 2022 as many businesses downgrade their office space requirements.

“I think the level of office work will not return to the same levels it was before the lockdowns, and as technology continues to improve, the decades-long trend towards higher levels of remote working will continue. “Loos said.

Two other factors exerting pressure on the demand for office space are the recession which has led to a reduction in employment in sectors using offices – such as financial services, and the so-called “hospitality” industry. office space. This means that employees must reserve office space in advance.

“Gone are the days when every employee had a desk for themselves. This sharing of office space will further reduce the need for office space in the years to come, ”says Loos.

He expects market rents and actual operating income on the property to remain under pressure.

Rate hike

Last week, the SA Reserve Bank (SARB) announced a 25 basis point repo rate hike to 3.75% – the first hike since 2018. For Loos, this will likely be another slight drag on the market. demand for commercial goods, as it is a highly credit market. dependent market. The FNB expects two more rate hikes of 25 basis points in 2022.

John Jack, CEO of Galetti Corporate Real Estate, points out that rising repo rates mean homeowners who are under pressure to service their debt will be under increasing pressure as cash flow tightens further.

“The best option in this current market is to find an owner-occupier who is looking to buy the property at a high price point,” he suggests.

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