Tough times for commercial property

Tough times for commercial property

Even shopping malls take some pain.

The commercial property sector has been under pressure during 2014 and persistent macro economic difficulties suggest its fortunes may not improve anytime soon.

Erwin Rode, property valuer and economist at Rode & Associates, says rental trends indicate that the industrial subsector may have been the best performer over the last few months followed by the retail sector (shopping malls). Office space has lagged both other subsectors.

Neil Gopal, chief executive officer of the South African Property Owners Association (Sapoa), says the industrial sector has continued to show good growth, but a prolonged slowdown in the manufacturing sector is expected to result in a drop-off in the demand for space in the sector.

The poorly performing economy could also add pressure.

Rode explains that the main drivers of the industrial market is manufacturing while good retail performance also indirectly creates a greater demand for certain goods that must either be manufactured or warehoused and distributed.

But while the industrial sector seems to be holding up somewhat better than retail and office space, it is a question of relativity.

Rode says all three subsectors are under pressure and rentals are growing below the inflation rate.

Shopping malls have been the best performer in the commercial space over the past 50 years, but Rode says in the current environment where consumers are under tremendous pressure, malls run the risk of losing that position.

Gopal says the retail sector is showing an average performance.

According to Sapoa’s Retail Trends Report for the second quarter of 2014, shopping centres in the Investment Property Databank (IPD) Retail sample recorded a year-on-year increase of 4.6% in sales per square meter in the year through June 2014. After adjusting for inflation this equates to marginally negative growth.

“Vacancy levels have been steadily rising over the past five years but remains below 3% in centres larger than 25 000sqm. However, smaller centres have seen vacancy rates rise significantly over the past six months. Neighbourhood centres have been particularly hard hit over the past six months,” the report states.

Gross rentals are increasing faster than sales which have led to a surge in retailers’ cost of occupancy.

“Cost of occupancy is currently the highest in the 10 year history of the series and is almost exclusively driven by higher administered costs,” the report says.

And pressure is likely to persist.

Rode says it takes many years to erect a new mall and there will probably be a lag of around two years before there will be a significant downturn in new supply.

“Demand will remain weak, make no mistake. The consumer is under huge pressure and I can’t see that pressure relenting within the next two, three years,” he says.

With regards to office space, Gopal says this sector is lagging the retail as well as the industrial sectors.

He says the office sector remains vulnerable, reflecting relatively high vacancy rates.

Rode says developers have been oversupplying the market especially in areas like Sandton in Johannesburg and in Cape Town and one would expect the office sector to have underperformed because of this oversupply that has developed.

He says there is no growth in the demand for employment and one shouldn’t expect much new demand for office space.

What is happening is “musical chairs” – some tenants are moving from Grade B to cheap Grade A office space because A rentals are under pressure.

“That is not going to change overnight – not given the macro economic situation in which South Africa is. In fact there is considerable risk to the downside,” Rode says.



Denny Crane

Denny Crane
It's not me ... yet. Denny Crane from the TV series Boston Legal. Click on picture if you're not sure who he is!