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MR JOHN LOOS

A SENIOR ECONOMIST PROSPECTIVE

Property Broker Survey –Market Balance Q2 2022
Brokers perceive that prior strengthening in demand-supply balance may have stalled in the 2nd quarter in the Office and Retail Markets, with only the Industrial Property Market still perceived to have strengthened.

We continue with the 2nd 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 be near to 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, while Gauteng’s Greater Johannesburg region remains the weakest by a significant margin.
  • 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 near-elimination in the bias towards “oversupply” in the Industrial Market, we remain of the expectation that this market will return positive growth in capital values in 2022. But the Retail Property and Office Property Markets’ near-term situation is more fragile. Both remain oversupplied, and rising interest rates and signs of a slowing economy may have begun to weaken their demand. This may have caused some renewed weakening in their market balances in the 2nd quarter of 2022, after prior improvement.

Average Time on the Market is only perceived as having “meaningfully” declined in the Industrial Market.

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 16.86 weeks being quicker than the 22.04 weeks in the case of retail and 29.72 weeks for office space.

Vacant industrial properties, too, averaged the shortest average time on the market of the 3 segments to the tune of 17.48 weeks, compared to 25.25 weeks in the case of retail space and 31.41 weeks in the case of office properties, in the 2nd 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, it is only the Industrial Property Market where brokers have a significant bias towards “diminishing average time on the market”

  • 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 4th 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”.

2 of the 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.

However, only the Industrial Market’s reading was “significantly negative”.

The Retail Index recoded a zero, implying that on average the group of brokers surveyed perceived unchanged average time on the market over the 6 months.

The Office Index showed the smallest negative (weakest) reading of -8.82 in the 2nd quarter, which was smaller in magnitude than the -11.29 of the prior quarter. This is a relatively small negative reading, and we would not regard it as “convincing” or “significant” enough to conclude that there is a clear decline in average time on the market in the Office Market.

However, we would perceive the Industrial Property Market’s reading to be more meaningful. It showed the strongest reading, a negative -32.39, following up on a -41.54 reading for the prior quarter. In addition, this was the 6th consecutive quarter in which brokers indicated a bias towards declining average time on the market, thus pointing to a very significant improvement in the 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 did not point to an “increasing time” bias in any of the 3 sectors in the 2nd quarter of 2022 survey, only the Industrial Market’s reading points to convincing evidence of further decline in average time on the market.

However, the aggregated responses in all 3 sectors were weaker (less negative or in retail’s case no longer negative) than the prior quarter’s survey, suggesting that all 3 markets may have lost some strengthening momentum of late, the Industrial Market being the only one appearing to still have clear strengthening momentum.

Industrial Property’s perceived trend towards “shortening time” on the market has been particularly convincing over the past year-and-a-half. 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, 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 significantly greater portion of respondents still pointing to “supply exceeding demand”, either “somewhat” or “far”, compared to those pointing to demand exceeding supply. The Industrial Market returns a response where respondents on average see this market as nearest to balance between demand and supply, i.e., 38% perceiving demand to exceed supply versus 45.1% perceiving supply exceeding demand (16.9% perceiving a balance). 79.2% perceive supply to exceed demand in Retail Property and a massive 94% 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 2nd quarter 2022 survey, the Industrial Property Market returned a slightly negative -1.41 reading, which would imply that it is very near to balanced. This is followed by Retail at a still very significant negative -93.76 and Office recording the weakest-149.99.

In short, respondents as a group strongly perceive the Retail and Office markets to be oversupplied, but the Industrial Market near to balanced.

However, the market balance readings in all 3 property classes have weakened from the 1st quarter survey, which suggests that earlier market strengthening momentum may have been dwindling.

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 for the 1st half of 2022, the Office Space survey points to Nelson Mandela Bay having the weakest demand vs supply balance, with its index being the most negative at -177.38. We should caution that this metro has the smallest survey sample size. It 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 -158.35. This reading is significantly weaker than Tshwane (-138.08) and eThekwini (-106.67), with Cape Town being the “least weak” of all the regions with a negative reading of -57.16.

In the Industrial Market, Greater Johannesburg is the weakest market, with a negative reading of -102.18, followed by Tshwane with+18.54. The strongest of the 5 were the 3 coastal metros, eThekwini with a slight +28.66 positive reading, Nelson Mandela Bay with +65.63 and City of Cape Town the strongest with +67.5.

In the area of Retail Property, the survey also points to the weakest demand-supply balance being in the Greater Johannesburg region, while Cape Town is the strongest.

Greater Johannesburg showed a negative reading of -170.44, followed by Nelson Mandela Bay with   -89.27. Tshwane was next with -73.95, similar to eThekwini’s -73.81.

The only market that appeared near to balance was City of Cape Town with a small positive of +1.96.

Conclusion

Perceptions regarding demand relative to supply remain weak in both the Office and Retail Markets, but not in the Industrial Property Market, which is perceived as almost in balance.

In surveys prior to the 2nd quarter survey, demand-supply balance in all 3 markets had been perceived to be strengthening.

However, in the 2nd quarter 2022 survey the strengthening trend appeared to stall in at least 2 of the 3 markets, the aggregated demand-supply response showing quarterly weakening in both the Office and retail markets.

This is believed to be the result of an apparent economic weakening in recent months, global and local economic pressures emanating notably from high energy prices, broader inflation surges and rising interest rates in response.

The Industrial Property Market remains the strongest one in terms of demand-supply balance, followed by Retail, with the Office Market being the weakest. The Office Market has the most significant longer-term challenges, with not only weak employment growth numbers in key services sectors hampering its demand growth, but greater levels of remote working compared to pre-lockdown levels also constraining demand for space.

At the strong end of the spectrum, Industrial Property benefits from a gearing up for greater online retail and all the warehousing and logistics requirements that this brings. However, even this sector’s strength must have limits at a time when the economy is coming under renewed pressure, which should imply inventory levels coming under pressure too, while the key Manufacturing Sector’s performance is likely to be mediocre at best. These are key macro drivers of industrial space.

At a major metro region level, the 1st half of the year reflected what we have been expecting for some time, i.e., that both business and household sentiment is the most positive in the Western Cape region (as seen in strong skilled labour “semi-gration numbers to that region), and that it was likely to be an economic and property market outperformer.

The Western Cape returned the strongest perceived demand-supply balances in all 3 major commercial property markets in the 1st half of 2022.

The Greater Joburg region returned the weakest in 2 of the 3 markets, while being the 2nd weakest in the Office Market.

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