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MR JOHN LOOS

A SENIOR ECONOMIST PROSPECTIVE

Property Broker Survey –Market Balance Q1 2022 – Brokers perceive that oversupplies in the 3 major commercial property buying/selling markets have been diminishing, with the Industrial Market possibly reaching demand-supply balance.
We continue with the 1st quarter 2022 results of our FNB Commercial Property Broker Survey, which 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-Occupied” Property Segment, a pre-requisite in selecting broker respondents is that they 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.

In this report, we deal with questions relating to the perceived balance/imbalance between demand and supply of properties being transacted in the main markets. Market “strength” refers to a relatively strong demand level relative to supply, and vice versa for market “weakness”. These questions include estimates of average times of properties on the market prior to sale, as well as perceptions of whether demand exceeds supply or vice versa.

Key themes that emerge from the results are:

  • The Industrial Property Market is still perceived to be the strongest of the 3 major commercial property sectors, i.e., Industrial, Retail and Office.
  • A perceived oversupply of property on the market relative to demand remains in the Retail and Office property classes, but the Industrial Market is perceived to have more-or-less reached demand-supply balance.
  • In the area of Industrial Property, it appears to be the 3 coastal metros, i.e., eThekwini, Nelson Mandela Bay and Cape Town, where the relative market strength lies, with Gauteng metro regions being the area of relative weakness. Greater Johannesburg is especially weak.
  • In the area of Office Property, all major metro regions are perceived to be heavily oversupplied. The City of Cape Town, however, is perceived to be the least oversupplied of these.
  • Given the apparent elimination in the bias towards “oversupply” in the Industrial Market, we remain of the expectation that this market will return to positive growth in capital values in 2022. Although still perceived to be oversupplied, both Retail Property and Office Property’s perceived oversupplies are diminishing. However, Office Property’s perceived oversupply is still a major one, and this leads us to expect further capital value decline in that property class this year.

 

Average Time on the Market is perceived as decreasing in all 3 markets.

From our residential market survey, we found the movement over time in the estimated average time of properties on the market prior to sale to be a useful indicator of changes in the balance between supply and demand, an increase in average time of properties on the market prior to sale signaling a deteriorating demand relative to supply and vice versa.

We have attempted to apply this same questioning to our commercial property broker survey, splitting the survey by the 3 main property classes, namely Office, Industrial and Retail, and splitting it further by “Vacant Properties” vs “Occupied Properties”

The relative picture between the 3 major property sectors is still one where brokers perceive the Industrial Property Market to be the strongest of the 3 classes, with an average time on the market for occupied industrial properties of 17.18 weeks being quicker than the 21.68 weeks in the case of retail and 27.98 weeks for office space.

Vacant industrial properties, too, averaged the shortest average time on the market of the 3 segments to the tune of 19.29 weeks, compared to 23.77 weeks in the case of retail space and 29.23 weeks in the case of office properties, in the 1st quarter 2022 survey.

In the FNB Commercial Property Broker Survey, it is more difficult to estimate average time on the market than is the case in the FNB Residential Property Estate Agent Survey. This is due to a far smaller sample size in the number of transactions, so from quarter to quarter the different groups of respondents do perceive average time quite differently, and the data moves can be more volatile.

However, in an easier-to-answer follow up question as to whether the past 6 months has seen average time of properties on the market increase, decrease or remain unchanged, brokers appear better able to assess the direction in average time as opposed to the actual average time itself. And, on average, the respondents have recently become biased toward “diminishing average time on the market” in all 3 major commercial property sectors.

  • Perceptions regarding the direction in “average time on market” over the past 6 months

The follow up question to the average time on the market estimate, is asking respondents whether they believe that the average time on the market has increased, decreased or stayed the same over the 6 months prior (i.e., since the 3rd quarter of 2021).

Out of the responses we create an index by allocating a +1 score to an “increased” response, a zero to an “unchanged” response and a negative -1 to a “declined” response.

The scale of the “Index for direction of change in time on the market over the past 6 months” is thus from +100 to -100. A score of +100 would imply that 100% of respondents perceived an increase in time on the market over the past 6 months (market weakening) and -100 would imply 100% of respondents perceiving a decline, while a zero level would mean that those providing an “increased” response is equal to those responding with “decline”.

All 3 property classes returned a negative number, implying that the aggregate of responses in these sectors points towards a shortening (market balance strengthening) in average time of properties on the market compared to 6 months prior.

This is the 1st time that we have seen a “decreased” bias reported in all 3 property classes since the 1st quarter of 2019.

The Office Index showed the smallest negative (weakest) reading of -11.29 in the 1st quarter, which was down from the +15.25 positive reading of the previous quarter. The Retail Index showed a mildly more significant negative reading of -20.76 in the 1st quarter of 2022, which was also improved from a positive figure of +13.47 in the 4th quarter of 2021.

The Industrial Property Market showed the strongest reading, a negative -41.54, which was improved on the negative reading of -32.36 in the prior quarter. This was the 5th consecutive quarter in which brokers indicated a bias towards declining average time on the market, thus pointing to a very significant improving demand-supply balance in this market.

So, while actual estimates of average time of properties on the market are difficult, and as such the trend in prior survey responses to this question aren’t always clear due to some volatility, the simpler follow-up question regarding direction in average time on market over the prior 6 months has shown less volatility and is thus likely a clearer indication of trends over the history of the survey. While this survey question had been pointing towards an “increasing time” bias in the Office and Retail Sectors not too long ago, the 1st quarter of 2022 saw the survey response become one of a “shortening time” bias in all 3 major commercial markets, albeit still a relatively small bias in the Office Market.

Industrial Property’s perceived trend towards “shortening time” on the market has become particularly convincing over the past year or so. The Office and Retail Property Markets have lagged Industrial considerably, however, reflecting not only the weak economic times in which South Africa still finds itself despite improvement, but also the key structural challenges to both the Retail and Office Property classes. The former market is being challenged by greater online retail along with a financially constrained consumer, and the latter has the challenge of greater levels of remote work along with improved efficiency in use of office space through hoteling of desk space.

Demand vs Supply Strength Perceptions

An additional supply-vs-demand question is asked, where the respondents are asked whether they perceive “demand far exceeds supply” (option 1), “demand exceeds supply somewhat” (option 2), the market is in balance” (option 3), “supply exceeds demand somewhat” (option 4) or “supply far exceeds demand” (Option 5).

The Office and Retail Property classes have greater portion of respondents still pointing to “supply exceeding demand”, either “somewhat” or “far”, compared to those pointing to demand exceeding supply. However, the Industrial Market possesses a slightly higher percentage of respondents, i.e., 47.7% perceiving demand to exceed supply versus 44.7% perceiving supply exceeding demand (7.7% perceiving a balance). 69.8% perceive supply to exceed demand in Retail Property and a massive 85.5% in the case of the Office Property Market.

We create an index from the responses, option 1 receiving a score of +2, option 2 a +1 score, option 3 a zero score, option 4 a -1 score and option 5 a -2 score.

The index is thus on a scale of +200 to -200, where +200 would imply 100% of respondents choosing option 1, and -200 meaning a 100% option 5 response.

In the 1st quarter 2022 survey, the Industrial Property Market returned a slightly positive +12.30 reading, which would imply that it is more-or-less in balance. This is followed by Retail at a still very significant negative -67.93 and Office recording the weakest       -116.11.

In short, respondents as a group strongly perceive the Retail and Office markets to be oversupplied, but the Industrial Market slightly undersupplied. The small magnitude of the positive reading in the Industrial Market would suggest to us that it is more-or-less balanced.

Provincial Comparisons – Demand vs Supply Strength Perceptions

Due to smaller sample size at individual metro level, we are concerned with volatility in the surveys, and therefore opt to use a 2-quarter average of survey responses for the Demand-Supply Perceptions Indices for individual regions.

Examining the perceived market balance by major metro region, the Office Space survey points to Nelson Mandela Bay having the weakest demand vs supply balance, with its index being the most negative at -179.17. We should caution that this metro has the smallest survey sample size, and could thus experience more volatile movements from quarter to quarter.

Of the bigger metro regions, Greater Johannesburg still has the weakest demand vs supply balance by a significant margin, with its index recording a negative -168. This reading is significantly weaker than Tshwane (-108.08) and eThekwini (-104.17), with Cape Town being the “least weak” of all the regions with a negative reading of -90.02.

In the Industrial Property Market survey, the 3 coastal metros come out noticeably stronger than the Gauteng Metros, with Nelson Mandela Bay having a positive reading of +109.83, followed by eThekwini with +105.98 and Cape Town with +75.

At the weakest end of the Industrial Property Market is Greater Johannesburg, with a negative index reading of -128.18, followed by Tshwane with a slightly positive +11.92.

In the area of Retail Property, the survey also points to weaker demand-supply balances in the Gauteng region versus a more balanced situation in the coastal metros.

Greater Johannesburg is the weakest market, with a negative reading of -169.31, followed by Tshwane with-88.24. The “least weak” of the 5 were the 3 coastal metros, eThekwini with a slight +1.19 positive reading, City of Cape Town slightly negative at -0.89, and Nelson Mandela Bay with -54.99.

Conclusion

Perceptions regarding demand relative to supply remain weak in both the Office and Retail Markets, but no longer in the Industrial Property Market, which is perceived as slightly undersupplied on a national average basis.

The recent surveys, however, have shown signs of improvement in market balances in all 3 commercial property classes despite Retail and Office still having some way to go to eliminating oversupplies.

After a sharp deterioration in broker oversupply perceptions in the Office Market up to the end of 2020, the Office Supply-Demand Perception Index readings are improved, from -167 reading in the final quarter of 2020 to a “less weak” -116.11 by the 1st quarter of 2022.

Since the Retail Market’s worst “oversupplied” reading of -139 as at the 2nd quarter of 2020, it has made significantly more progress towards balance than the Office Market, recording a negative -67.93 as at the 1st quarter of 2022.

The Industrial Market, however, has made the most progress in restoring balance, seeing its “oversupplied” reading diminish from a worst -139 as at the 2nd quarter of 2020 to a slightly “undersupplied” positive reading of +12.3 by the 1st quarter of 2022.

The fact that 2 of the 3 markets are still perceived as significantly “oversupplied”, with only the Industrial Market in balance, is still reflective of the deep lockdown-related economic recession that South Africa’s economy went through in 2020, still not having “fully” recovered to pre-COVID-19 GDP levels.

However, the fact that average broker perceptions in all 3 of the markets have been on an improving trend is reflective of the impact of a recovering economy through 2021/early-2022 following the deep recession of 2020.

In addition, the 1st quarter 2022 broker survey was undertaken in February, shorty after the 2nd SARB 25 basis point interest rate hike of January. It suggests that initial interest rate hiking had not yet halted the strengthening trend in all 3 markets. Typically, commercial property markets are less interest rate sensitive than the residential home buying market, so it may require a few more interest rate hikes before the commercial property strengthening trend does indeed stall.

The impressive strengthening in the Industrial Market back to balance, and slightly beyond, leads us to expect that market to experience positive capital growth in 2022, possibly even in inflation-adjusted “real” terms.

Retail property’s prospects for positive real capital growth this year still hang in the balance, but we remain of the expectation that the still very weak Office Market will see further decline in capital values in 2022, albeit a diminished rate of decline compared to 2021.

Examining perceived oversupply by region, the relatively weak market balance picture in Gauteng relative to the coastal metros continues to come out strongly. Greater Johannesburg is a particularly weak market, showing the weakest perceived market balance in both Retail and Industrial Property, and the 2nd weakest balance in the Office Market.

A further observation is that, although we emphasize the strength of the Industrial Property Market nationally, this strength is far more noticeable in the 3 coastal metros, with Tshwane perceived to be more-or-less balanced. But Greater Johannesburg’s Industrial Property Market is still perceived to be significantly oversupplied.

2022-01-28T00:00

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