The 4th Quarter of 2019 FNB Commercial Property Broker Survey recently released shows that all 3 major commercial property sectors, i.e. Office, Industrial and Retail, declined in perceived market activity levels.
The percentage of respondents perceiving business conditions to be satisfactory declined for the 3rd consecutive quarter, from 49% in the 3rd quarter to 31% in the 4th 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 perhaps) about the Industrial and Warehouse Property Market.
However, Industrial Property’s 4th quarter activity rating did decline noticeably, recording 4.71, down from 5.25 in the prior quarter’s survey. By comparison, the Retail Property Activity Rating was noticeably lower at 4.14 in the 4th quarter, down from the prior quarter’s 4.51, while the Office Property Market also declined from 4.62 in the 3rd quarter to a lowly 4.06 in the 4th quarter survey.
Here are more of the key points/findings by the FNB Commercial Property Broker 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 4th quarter survey. The market with the highest index reading was Industrial Property, although this was nevertheless still a weak reading of -12. The Office Sector Index reading was a negative of -36, implying that the percentage of respondents perceiving a decrease in activity in this sector exceeded those perceiving an increase by 36 percentage points. The Retail Market returned the weakest reading of the 3, a negative -52.
- The Property Market Activity Near Term Expectations Indices, reflecting broker near term expectations, saw the respondents as a group being least optimistic about the Retail Property Market, which recorded a negative -6, whereas the Industrial Property Market recorded a +22 and the Office Property Market +8.
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.
LISTEN TO John Loos_FNB Property Sector Strategist
Broker satisfaction with business conditions deteriorates again in the 4th 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 4th quarter of 2019, the percentage of respondents experiencing conditions as satisfactory declined significantly yet again, from 49% in the 3rd quarter to 31%, the 3rd consecutive quarter of decline.
This now means that for the 2nd consecutive quarter, the majority of respondents (69%) are dis-satisfied with business conditions.
This now lowly 31% of those still satisfied appears to bring broker confidence levels more into line with weak overall national business confidence, as portrayed by the RMB-BER Business Confidence Index, whose level is 26 (also on a scale of 0 to 100).
Activity Rating by Major Property Class – All 3 sectors weaken in Q4
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 4th quarter activity rating again declined noticeably, recording 4.71, down from 5.25 in the prior quarter’s survey.
By comparison, the Retail Property Activity Rating was noticeably lower at 4.14 in the 4th quarter, down from the prior quarter’s 4.51, while the Office Property Market also declined from 4.62 in the 3rd quarter to a lowly 4.06 in the 4th quarter survey.
Retail seen as having weakened the most over 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 4th quarter survey, the market with the highest index reading was the Industrial and Warehouse Property Market, although this was nevertheless still a weak and negative reading of -12, and down from the prior quarter’s -10. This implies that the percentage of respondents perceiving a weakening in activity in this sector exceeds those that perceived strengthening by 12 percentage points.
The Office Property Market reading was a negative of -36, implying that the percentage of respondents perceiving a decrease in activity in this sector exceeded those perceiving an increase by 36 percentage points, and this was well weaker than the prior quarter’s -3.03.
The Retail Market returned the weakest reading of the 3, a sharply negative -52.
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.
The respondents as a group are least optimistic about the Retail Property Market, which recorded a negative -6 reading, whereas the Industrial Property Market recorded the strongest reading of the 3 sectors, a positive +22, while Office was in between on +8.
The most noticeable weakening in expectations from the prior quarter was is in the Retail Property Expectations Index, whose prior quarter reading was zero.
Key drivers of Brokers’ Expectations –Weak economy seen as the biggest influencing factor
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.
Seasonality in the 4th quarter survey was seen as a slightly more positive boost for near term activity levels than in prior quarter surveys. But seasonality aside, the noticeable feature in this set of responses for the 4th quarter 2019 survey was once again a very high level of respondents pointing to “Economic and Political Uncertainty” and a very low percentage pointing to “Business Positive Sentiment”, seemingly in line with what most economic data tells us.
- The Office Market
In the 4th quarter survey, the Office Property component showed 46% of respondents citing “Economic and Political Uncertainty”, and a far lesser 3% perceiving “Positive Business Sentiment”, as key factors influencing their near-term expectations of activity.
Those perceiving “Positive Business Sentiment” had dropped quite substantially from 19.7% in the prior quarter’s survey, while the “Economic and Political Uncertainty” percentage remained very similar to the 47% of the 3rd quarter.
Within the “Economic and Political Uncertainty” sub-categories, the lion’s share of respondents (43%) pointed to a weak and unstable economy, and looming ratings downgrades, but with very little specific mention of electricity supply issues or high rates and utilities tariff costs.
- The Industrial and Warehouse Market
The picture was similar in the Industrial and Warehouse Property Market component, with a slightly lower 40% citing “Economic and Political Uncertainty”, while a lesser 8% cited “Positive Business Sentiment”.
- The Retail Property Market
In the Retail Property Market component, 54% of respondents cited “Economic and Political Uncertainty” against only and 4% perceiving “Business Positive Sentiment” in the 4th quarter survey.
Some other insights from the “reasons for expectations” response
The impact of technology on office space, through remote working, and retail space demand through E-Commerce, remains perceived as relatively low compared to the negative impact of toughening economic times, according to the brokers surveyed.
While the “Economic and Political Uncertainty” reason for activity expectations looms large in all 3 property sectors, one has to look more carefully for responses pointing to disruption by technological progress.
In the Office Sector response we see nothing specifically technology related yet. However, in the Retail Property response it does exist. In the 4th quarter survey, 14% of respondents cited “shoppers moving on line…leading to a decline in shoppers coming to malls”, and for the four 2019 surveys, this factor’s percentage has averaged 14.5%.
So online shopping is consistently seen as a factor in influencing Retail Market performance and activity by a not insignificant percentage of brokers. However, it still appears to be seen as far less troublesome than the weak state of the economy, which places consumers under financial pressure.
In this 1st part of the FNB Property Broker Survey, which relates to perceived market activity, there has been a clear deterioration in perceptions regarding recent activity, although not so in the case of forward-looking near-term expectations.
This activity weakening shouldn’t have come as a surprise as SA’s long term economic stagnation continues.
All 3 Property classes have seen a 4th quarter perceived weakening in activity levels. The Industrial and Warehousing Property Sector remains the strongest of the 3 activity-wise, according to the respondents, while the Office Property Sector’s perceived activity is the weakest, but with Retail Property at a very similar weak level.
But ultimately, the weak economic fundamentals related to Industrial Property appear to have begun to dampen demand for this (to date) more resilient property class too, placing it on a weakening activity trend along with the other 2 sectors.
Compared to 6 months prior to the 4th quarter survey, the respondents on aggregate perceived all 3 markets to have weakened in terms of activity levels, with the most significant percentage of respondents perceiving the Retail Property Market activity level to have weakened.
Looking ahead to expected activity in the coming 6 months, the group on aggregate is most optimistic about activity in the Industrial and Warehouse Market, but expects a decline in the ailing Retail Market’s activity level.
However, while the brokers are, on average, biased mildly in favour of a near term increase in market activity in the Office and Industrial Markets (some positive seasonal factors playing a minor role), in all 3 markets they point to “Economic and Political Uncertainty” as the key factor influencing their near-term expectations.
Their weak sentiment in the 4th quarter can also be seen in the fact that only 31% of respondents indicated that they were satisfied with current business conditions.
Finally, while online shopping is perceived as a potential negative impact for retail property, the weak state of the economy still appears to be seen as a far more significant factor.