Commercial real estate market – From Covid-19 risk to stagflation risk

During the strict lockdown period of 2020, the FNB saw the average value of commercial real estate capital per square meter decline by -7.41%, using MSCI data, before resuming weak positive growth of +1, 54% (MSCI data) in 2021.

The multi-year correction in the commercial real estate market looks set to continue over the FNB’s economic forecast period.

During the strict lockdown period of 2020, the FNB saw the average value of commercial real estate capital per square meter decline by -7.41%, using MSCI data, before resuming weak positive growth of +1, 54% (MSCI data) in 2021.

But the low positive growth rate achieved did not signal the end of the longer-term correction. The growth rate of +1.54% in 2021 translates into a real decline, corrected for GDP inflation, in the value of capital of -5.2%, so that in reality the correction of the value of commercial real estate continues.
Using the inflation-adjusted real value measure, the cumulative decline in the real value of retail capital/square meter was -24.4% from the all-time high reached in 2015.

This was influenced to a large extent by a cumulative decline in real net operating profit (corrected for GDP inflation) of -18.5% since 2015, which reflects the gradual increase in financial pressure on the consumers while economic growth has generally stagnated in recent years. decade or more.

There is no doubt, however, that since the sharp drop in GDP and household disposable income linked to the confinement in 2020, the situation has improved for the consumer and for the retail and commercial real estate sectors. But at this time, it is unclear whether the improvement from this anomalous situation in 2020 is sufficient to sustainably return commercial real estate net income and capital value growth to positive real growth. .

Consumer confidence in Q1, according to the FNB-BER Consumer Confidence Index, showed further deterioration, falling from an already low level of -9 in the previous quarter to -13 in Q1, inflationary pressures from consumer prices (CPI) becoming more severe, global oil price pressures resulting in a significant increase in the price of gasoline, and threat of food price pressures related to the conflict in Ukraine. Adding to these inflationary pressures are major global supply chain disruptions, which began during the Covid-19 shutdowns and seek to continue due to new Chinese shutdowns and a myriad of boycotts and sanctions. Russians. Global “stagflation” is a much talked about risk in the world right now, a scenario of higher inflation and weak growth. This is a key risk from a commercial real estate perspective.

Domestically, CPI inflation is not yet severe, at 5.9% yoy for March, but it has risen markedly since the low of 2% in May 2021, implying a decline increase in real disposable income due to inflation in recent times compared to a little less than a year ago. This, coupled with further “normalization” of economic activity to come from the hard shutdowns of 2020, leads to an FNB household real disposable income forecast of 2.1%, slower than the 4.2% for 2021. , leading to a similarly low real income. consumption growth.
A return to weak economic and real household disposable income growth, similar to the rates of the past decade, appears to be a recipe for a further gradual decline in real commercial property values.

In short, 2022 should see commercial real estate continue its longer-term trajectory of growth in nominal income and capital value, but real income and capital value will decline.

More interesting, however, in our opinion, is that the superregional centers seem to close the performance gap between themselves and the smaller community and neighborhood centres. The good news appears to be that Covid-19 has receded as a risk in South Africa, and retail restaurants and entertainment areas have partially recovered. This can greatly improve the fortunes of those large “experience” malls which are heavier on non-essential expenses and entertainment, and this is perhaps what we are already seeing in the super regional category, if not as much in the small regional categories.