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Property Talk

Property Talk

Author: Andreas Wassenaar
Date: 2018-11-02

Weak economy has its advantages

Commercial property demand in and around Ballito has increased as the area has developed and for those of us living in the greater area, we have access to and are enjoying the convenience of having all the amenities imaginable within easy reach and without the traffic and congestion that typically goes with a larger town or city.

The decline in national GDP growth has however worked its way through the commercial property space over the past year and according to FNB's recent report on the commercial property sector we are seeing the return to single-digit returns for the first time since 2009.

Retail property has outperformed both office and industrial for the past 9 years but has now come under pressure. Industrial property was the top performer in the 1st half of 2018. Structural changes to an industry such as E-commerce impact directly on retail space demand - when you order a good from Takealot.com the warehousing and distribution space for that company is supported as is the courier service that delivers the parcel but no retail space is required by that company.

However, the stagnant economic growth is the main driver of less demand for retail space as well as office and industrial property. The health of the commercial property sector is often reflected in vacancy rates. Cape Town is lower than Johannesburg and Durban on an "All Property Vacancy Rate" of 2,3% compared to Durban's 4.7% and Johannesburg's 7.2%. Johannesburg's Office vacancy rate is currently a massive 15,3%, Retail 5% and Industrial 3,8%.

Durban also has a high Office vacancy rate of 11,2%, but a healthier Retail vacancy rate of 2,5% and a very low Industrial vacancy rate of only 0,4%. This clearly reflects the shortage of the supply of Industrial Property within the greater Durban area and this is where we should watch for the development of new Industrial property nodes such as Cornubia and Compensation Flats.

Cape Town has a relatively low Office vacancy rate of 4,5%, Retail of 1,6% and Industrial vacancy rate of 1,3%. For Durban based developers the sector to target would therefore be Industrial zoned land and could even attract manufacturers and distributors from other parts of the country.

One of the interesting stats from the FNB report is that GDP growth rates below 1,5% per annum, characteristic of what we have experienced since 2015, are insufficient to prevent a decline in real property values.

Despite arguments surrounding the structural disruption of a sector such as Retail by E-commerce, all three commercial property sectors have experienced a decline in returns provided. The first half of 2018 showed total half-yearly returns on Industrial Property at 5,85%, higher than Retails 5% and Office Property's 3,8%.

These returns are significantly down on the 9,9% reached by both Retail and Industrial four years ago in the 1st half of 2014. From all the economic indicators related to the three commercial property sectors, it is evident that they all have challenges emanating from a weak economy and all would feel some disruption from technological advances with all three seeing returns noticeably down over the past four to five years.