Retail Property

Key points:

• It is possible that in 2018, commercial property could return to single-digit total returns for the first time since 2009. Total half-yearly returns (total return including both net income and capital growth elements) reached a post-2008 recession high of 9.5% in the first half of 2013. From there onward, however, FNB has seen a broad weakening to 4.7% by the first half of 2018, the lowest total return estimate since the first half of 2011.
• The “correction” in average capital value in “real” terms continues. At recent slow rates of capital growth the market is effectively in a gradual “correction”. Using a GDP deflator to estimate economy-wide inflation, the 0.7% half-on-half property capital growth rate compares poorly with a 4.4% half-on-half GDP deflator inflation rate, translating into a -3.53% half-om-half “real” capital value decline. This means that the past three consecutive semesters have shown negative real property capital growth, and five out of the past seven semesters have been negative.

This suggests that economic growth rates below 1.5%, characteristic of the period since 2015, are insufficient to prevent a decline in real property values.

• Retail property may no longer be the “out performer” in terms of capital growth, having outpaced both office and industrial for the past nine years. But the other two sectors also have their challenges. In the first half of 2018, industrial property was the top performer of the three major property sectors, the other two being the retail and office sectors. The emergence of E-Commerce has been cited as a key challenge to the retail property sector, a challenge that can even remove it from its “out performer” status amongst the three property sectors over a good number of years. However, all three major property sectors have been heading weaker in recent years, and FNB believes the key threat for all of them currently is multi-year economic stagnation. Retail, however, has the additional challenge of experiencing a far greater affordability deterioration over the past two decades than the other two major property categories, with far stronger capital value and rental growth over the period. This is expected to be a key “drag” on retail property in the near term in a weak economy.
• Cape Town’s “fundamentals” still appear healthiest of the major three cities. The all property vacancy rate for Cape Town is noticeably lower than either Johannesburg or Durban, Cape Town on an all property vacancy rate of 2.3% (and still declining as at H1 2018), compared with Durban’s 4.7% and Johannesburg’s 7.2%, the latter city having seen a sharp vacancy increase of late.