The FNB Commercial Property Broker Survey 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-Serviced” market, a pre-requisite in selecting broker respondents is that they at least 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 focus on the part of the survey where we ask respondents to rate their perception of the buying/selling market’s (i.e. not rental market) activity levels on a scale of 1 to 10, 10 being the strongest activity level rating.
The term “activity” is as experienced by a property broker, and can include everything from indications of interest in buying or selling, e.g inquiries or viewings related to potential buying or listing, through to actual transaction levels.
Key Points from the Survey:
- The 2nd Quarter of 2020 FNB Commercial Property Broker Survey saw all 3 major commercial property sectors, i.e. Office, Industrial and Retail, showing declines in perceived market activity levels. This is hardly surprising, given that the survey took place from late-May to mid-June, commencing at a time when there was still a high level of COVID-19-related lockdown, placing severe limitations on the level of property trade.
- The percentage of respondents perceiving business conditions to be satisfactory declined to the lowest level since the early-2019 inception of the survey, from 49% in the 1st quarter to 31% in the 2nd quarter.
- When asking brokers for their ratings of market activity levels on a scale of 1 to 10, we still see that the group of respondents is most upbeat (or least pessimistic) about the Industrial and Warehouse Property Market. However, Industrial Property’s 2nd quarter activity rating did decline noticeably, recording 4.11, down from 5.52 in the prior quarter’s survey. By comparison, the Retail Property Activity Rating was by far the weakest at 2.87 in the 2nd quarter, down from the prior quarter’s 4.91, while the Office Property Market also declined from 4.55 in the 1st quarter to a lowly 3.39 in the 2nd quarter survey.
- Our “Indices for Perceived Change in Market Activity over the Past 6 Months” were all negative (i.e. perceived activity declines on an aggregated basis) in the 2nd quarter survey. The market with the highest index reading was Industrial Property, although this was nevertheless still a weak reading of -53. The Office Sector Index reading was a negative of -75, implying that the percentage of respondents perceiving a decrease in activity in this sector exceeded those perceiving an increase by 75 percentage points. The Retail Market returned the weakest reading of the 3, a negative -82.
- The Property Market Activity Near Term Expectations Indices, reflecting broker near term expectations, saw the respondents being least optimistic about Retail Property, which recorded a negative -30, while the Industrial Property Market recorded a +32 and the Office Property Market -23.
Broker satisfaction with business conditions deteriorates in the 2nd quarter
Before we survey activity level perceptions, we ask all respondents to say whether they find business conditions “satisfactory” or not in the form of a simple “yes or no” answer. In the 2nd quarter of 2020, the percentage of respondents experiencing conditions as satisfactory declined noticeably, to its lowest level yet, from 39% in the 1st quarter to 20%, resuming a broader declining trend since early last year when the survey was initiated.
This now means that for the past 4 quarters, the majority of respondents (80% in the 2nd quarter of 2020) are dis-satisfied with business conditions.
This broadly declining trend suggests that broker confidence levels have been tracking overall national business confidence lower, as portrayed by the RMB-BER Business Confidence Index, which has been declining for some years, and whose level was a lowly 5 (on a scale of 0 to 100) in the 2nd quarter of 2020.
Activity Rating by Major Property Class – All 3 sectors weakened in Q2
When asking brokers for their ratings of market activity levels on a scale of 1 to 10, we still see that the group of respondents is most upbeat (or least pessimistic perhaps) about the Industrial and Warehouse Property Market. However, this market’s 2nd quarter activity rating declined significantly too, recording 4.11, down from 5.52 in the prior quarter’s survey.
By comparison, the Retail Property Activity Rating was noticeably lower at 2.87 in the 2nd quarter, down from the prior quarter’s 4.91, while the Office Property Market was between the 2 former sectors, recording 3.39 in the 2nd quarter, down from 4.55 in the prior quarter.
Retail was seen as having weakened the most over the past 6 months
We ask a follow up question as to whether the respondents have perceived a decline, increase or no change in activity levels compared with 6 months prior. From these results we compile an index, allocating a score of +1 to each percentage points’ worth of “increased” responses, zero to that of “unchanged” responses and -1 for that of “decreased” responses. The index is thus on a scale of +100 to -100.
In the 2nd quarter survey, the market with the highest index reading was the Industrial and Warehouse Property Market, although this was still a very weak and negative reading of -53, and down from the prior quarter’s -8. This implies that the percentage of respondents perceiving a weakening in activity in this sector exceeds those that perceived strengthening by 53 percentage points.
The Office Property Market reading was a more severe negative of -75, implying that the percentage of respondents perceiving a decrease in activity in this sector exceeded those perceiving an increase by 75 percentage points, and this was well weaker than the prior quarter’s -22.
The Retail Market returned the weakest reading of the 3, a sharply negative -82.
Outlook – Respondents least optimistic about Retail Market over next 6 months
We compile an index using the same methodology, but this time asking brokers for their expectations of the direction of market activity in the 6 months ahead (“increase”, “stay the same” or “decrease”).
The respondents as a group are least optimistic about the Retail Property Market, which recorded a negative -30 index reading, whereas the Industrial Property Market recorded the strongest reading of the 3 sectors, a positive +32, while Office was in negative territory on -23.
The most noticeable weakening in expectations from the prior quarter was is in the Office Property Expectations Index, whose prior quarter reading was +6, followed by Retail whose reading also dropped sharply from a previous quarter’s -3.
Key drivers of Brokers’ Expectations –COVID-19 impact seen as the biggest influence.
In an open-ended follow up question to the previous one regarding expectations of near-term activity direction, we ask brokers to provide reasons as to why they expect the direction that they do.
The near term expectations regarding activity levels were overwhelmingly negative, and “COVID-19” was by far the most dominant reason for the negative expectations recorded.
The previously dominant major category of “Economic and Political Uncertainty” appeared all but forgotten in the latest survey. However, this was not entirely the case, as a significant portion of the COVID-19 reasoning related to its negative impact on the economy. This is not surprising, given that the country was still in a high level of lockdown as this survey was being undertaken from late in May to mid-June, the country moving from Level 4 to Level 3 Lockdown early in June.
Perhaps it just means that brokers had, at least for the time being, perceived COVID-19 lockdown to have far worse implications for the economy than the myriad of structural factors that have constrained economic performance for many years prior to COVID-19.
The Office Market
In the 2nd quarter survey, the Office Property component showed 73% of respondents citing “Effect of COVID-19” as a key factor driving their activity expectations.
Looking at the sub-components of this key factor is perhaps more insightful though. A very significant 31% of brokers see COVID-19 impacting negatively on the economy, thereby dampening office property market activity. A further 18% said they were “waiting to see” what the economic impact would be post-lockdown.
But very significant, too, is 38% of brokers who believed that companies were busy reconsidering their office space needs, considering a greater portion of their workforces working remotely post-lockdown, and possibly reducing their office space. A significant portion of brokers are thus perceiving what has been much talked about ever since lockdown forced a major portion of office staff to work from home.
Remote work has become a key potential challenge to Office Market performance on top of SA’s long term economic stagnation.
The Industrial and Warehouse Market
The picture was slightly less severe in the Industrial and Warehouse Property Market component, with a lesser 53% citing “Effect of COVID-19” as a key factor driving near term activity expectations. Within this category, Economic concerns emanating from COVID-19 disruptions were recorded by 30% of respondents, while a significant 18% expected distressed sellers to come into the market in significant numbers.
The 2nd major factor driving expectations related to “changing market conditions”. Here, industrial space’s better affordability created some positive expectations, 11% of respondents expecting some demand to be generated by small businesses, while also believing that investors are still finding value in this market. Another 11% believed that the online trend in business, especially retail, would create demand for storage space, while some even believed that certain warehouse space would be converted to (perhaps more affordable) office space,
The Retail Property Market
In the Retail Property Market component, 91% of respondents cited “COVID-19” as a key factor. The overwhelming majority of these respondents were mainly concerned with the economic impact on retail property (via the impact on consumer finances).
Interestingly, this survey saw very little mention of reductions in rentals, and also very little about the online shopping “threat”. It was overwhelmingly about the near term economic concerns.
The 2nd quarter FNB Property Broker Survey was undertaken from late-May to mid-June, at which stage South Africa transitioned from “Level 4” Lockdown to “Level 3”. Level 4 had posed severe constraints on doing business in the Property Sector as well as amongst many of its clients.
The lockdown restrictions would thus explain a significant portion of weakness in market activity ratings.
Coupled to this, COVID-19 had likely dragged the SA economy into a far deeper recession that what it was already experiencing up until the 1st quarter of 2020. Such an economic environment is also not conducive to strong property market activity, and in their near term expectations a major portion of brokers expressed this concern about the COVID-19 economic impact.
Interesting is that the COVID-19 Crisis and its economic impact is seen as so severe, that concerns around SA’s well-documented economic structural constraints and flawed economic policy appear all but forgotten of late, hardly featuring in the 2nd quarter survey. This, however, doesn’t mean that they have abated. Rather, it just points to the severity of the COVID-19 lockdown.
A further interesting insight is that the broker survey respondents appear to have “over-expected” noticeably on the Industrial Property Market since the survey began early last year. In each quarterly survey, the bias of the response group has been towards expectations of strengthening Industrial Market activity in the near term. However, when asking respondents about activity direction in the past 6 months, in only 1 of the 6 quarters surveyed had the respondents reported an increase in activity on a net basis. What was expected thus did not appear to match what ultimately happened in this sector.
Delving into key factors driving broker near term activity expectations, besides the overwhelming concern with the economic impact of COVID-19, some other interesting insights came out in the individual sectors.
Firstly, one which we had expected was a strong view that office property demand could be impacted by companies revising their office space requirements, which is not only linked to economic pressures but also due to the big boost that remote working received from the forced lockdowns. This is ominous for the future performance of the Office Property Market.
A 2nd feature relates to Retail Property expectations, where there was very little mention about a boost to online shopping received from the lockdown. Concerns around retail property performance centered largely on the economic impacts of this COVID-19 Crisis, which would impact strongly on retail property via a big dent to consumer disposable income
Alan Straton
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