ANALYSIS | 10 key themes to look out for in the commercial property market in 2022 | Fin24

2022/01/18 18:00:00

There won't be fireworks in the property market this year. But there are a few positives to look out for, writes John Loos.

There won't be fireworks in the property market this year. But there are a few positives to look out for, writes John Loos.

There won't be fireworks in the property market this year. But there are a few positives to look out for, writes John Loos.

The expectation of a further rise in the government debt-to-GDP ratio, with government finance under ongoing pressure, along with short term interest rate hiking, is expected to exert upward pressure on long bond yields and therefore property capitalisation (cap) rates in 2022, with cap rates being a source of downward pressure on real commercial property values.

Average capital value per square metre on commercial property expected to stop falling in nominal terms in 2022, but not in"real" inflation-adjusted terms.How far are we into the multi-year correction in real property values?Hotel Property Market expected to improve in 2022, but still lag well behind the"big 3" commercial property classes.

Read more:
Fin24 »

#ECRSoundsLikeSummer

This summer's going to be hot and so is our playlist. Click here to see what's in it for you... Read more >>

ANALYSIS | The rand in 2022: What to expect | Fin24Weighing up the local and global risks, it's likely that the rand will remain under pressure during 2022, writes Ryan Booysen.

Musa Keys to Pabi Cooper: Five amapiano artists to watch in 2022Musa Keys to Pabi Cooper: Five amapiano artists to watch in 2022 Musa Keys and 'Isphithiphiti' hitmaker Pabi Cooper are just two amapiano artists to watch in 2022. Take a look...

In-depth: Top 10 health issues to watch in 2022 | CitypressCovid-19 will continue to dominate headlines in 2022, but from national health insurance (NHI) to the availability of a new HIV prevention injection, it will also be an important year for other areas of health service delivery. Majority of us has lost in this trade why very few haven't loss a dime simply because they work with a honest and legit manager LindaStouffes she is the best🙏 I never thought of meeting a legit bitcoin trader after been scammed many times at my age but the heavens sent williamchurch09 guided me and help me make a living through bitcoin with my coinbase app, I recommend you to meet him now and also be a beneficiary of good work I just earned R50,000 trading with Tatiana_Fx_ its unbelievable I know that but it's true and I promised that I would share the good news to everyone I can if it worked for me and that's exactly what am doing now. Give it a try as well Tatiana_Fx_ She's by far the best..

Reit roulette: what to buyThe JSE’s property groups are likely to continue clawing back multiyear losses in 2022, but it’s not a blanket bet.

Reit roulette: what to buyThe JSE’s property groups are likely to continue clawing back multiyear losses in 2022, but it’s not a blanket bet.

Reit roulette: what to buyThe JSE’s property groups are likely to continue clawing back multiyear losses in 2022, but it’s not a blanket bet.

to sustain multi-year broad rising trend in capitalisation rates The recovery of the global economy subsequent to 2020’s hard lockdown-related recession, coupled with major global supply chain disruptions to the supply side of the economy, has unleashed a surge in inflationary pressures.Subscribers can listen to this article Ryan Booysen, managing director of DG Capital Forex.Musa Keys and ‘Isphithiphiti’ hitmaker Pabi Cooper are just two amapiano artists to watch in 2022.NEWS Covid-19 will continue to dominate headlines in 2022, but from national health insurance (NHI) to the availability of a new HIV prevention injection, it will also be an important year for other areas of health service delivery, governance and reforms in South Africa.

Domestically, the CPI (Consumer Price Index) inflation rate rose through much of 2021, from 2.9% year-on-year as at February last year to 5. Gazing into our crystal ball for the rand in 2022, the Covid-19 Omicron variant remains a significant unknown in the market.5% by November, with petrol and food prices being key influencing factors. This took the CPI inflation rate up to near to the 3-6% upper target limit of the SARB, which responded by raising interest rates by 25 basis points in November 2021. You can cancel any time. Three more such 25 basis point interest rate hikes are expected in 2022, taking prime rate from its current 7. Mkhize took the SIU findings implicating him on judicial review.

25% level to 8% by year end. The expectation of a further rise in the government debt-to-GDP ratio, with government finance under ongoing pressure, along with short term interest rate hiking, is expected to exert upward pressure on long bond yields and therefore property capitalisation (cap) rates in 2022, with cap rates being a source of downward pressure on real commercial property values. From a decade low monthly average of 6.9% in May 2013, the monthly average long bond yield ended the year 2021 three percentage points higher at 9.9%, and the broad rising trend is expected to continue in 2022. Director-general Sandile Buthelezi, who himself was suspended and then reinstated, said in a press briefing on Friday that the department’s legal team was dealing with the matter and the disciplinary process was expected to be completed by mid-February.

3.    Average capital value per square metre on commercial property expected to stop falling in nominal terms in 2022, but not in"real" inflation-adjusted terms. Despite the economy remaining weak, and only expected to get back to 2019 level of real GDP this year, three years later, the economy will likely be significantly improved from the hard lockdown year of 2020. We therefore expect that actual ("nominal") average capital values on commercial property will at least halt their decline or recent years in 2022, moving back into very low single-digit positive territory in 2022. However, rising cap rates and weak net operating income growth is expected to keep average capital values in"real" declining territory, in other words the low capital growth that may be experienced is not expected to keep pace with the general price inflation rate in the economy. Yet, in 2022, we are still adjusting the mechanics of the vehicle that must get us there.

The multi-year correction in property values is thus in effect expected to continue in 2022, albeit at a slower pace and in real terms only. How far are we into the multi-year correction in real property values? Since the second half of 2018, average capital value per square metre had declined by -9.5% as at the first half of 2021, according to MSCI data. But 2016 was the year in which the correction really started, in lagged response to broadly stagnating economic growth since around 2012. While actual (nominal) valuations weren’t yet declining significantly until much later, nine out of 11 semesters from 2016 to the 1st half of 2021 have shown real (GDP inflation-adjusted) declines in average values when compared with the preceding semester. A critical issue to watch this year is whether MPs take these inputs on board and make significant changes to the bill, or simply force through a mostly unchanged version of the bill.

So, while actual valuations have dropped far less, in real terms (the proper way to assess a correction) the cumulative decline in the MSCI All Property Average Capital Value has been a significant -29% from the first half of 2016 to the first half of 2021. 4.    Hotel Property Market expected to improve in 2022, but still lag well behind the"big 3" commercial property classes. While much economic activity has normalised as lockdown regulations have been eased, three major challenges face the battling hotel property class. Firstly, a large portion of demand for hotel rooms is non-essential in nature, and with many businesses and households financially pressured in the aftermath of the major 2020 recession, many will continue to put travel and hotel stays on the back burner. In an attempt to address this increase, the health minister asked the SA Law Reform Commission to investigate and make proposals for a new legislative framework to regulate these claims.

Secondly, given the successful"zoomification" of much business interaction during the lockdown period, a portion of business travel that used to take place prior to Covid-19 is likely not to return. Thirdly, South Africa has been plagued by limitations on foreign travellers to the country. Vaccine rollout is key in improving this situation, but the Sub-Saharan African region is reportedly behind with this rollout. All three of these challenges are expected to be in part alleviated in 2022, enabling an improved hotel property market year, but insufficient to end this class’ underperforming of the"big 3" commercial property classes. By October 2021, average hotel occupancy rate had risen to only 31. First introduced in Parliament in 2018, the bill is government’s answer to the ballooning medical negligence claims against departments.

6% from 18.8% in October 2020, which was still far below the 52.8% of October 2019, while total hotel income for October 2021 was still 32.9% down on October 2019. 5. Of course, the most valuable progress would be to prevent medicolegal claims from occurring in the first place.

  More employees expected to work from the office in 2022, but not at levels sufficient to end the rising office vacancy trend yet. The office property class is expected to be the under-performer of the three major commercial property classes in 2022, with its already high average national vacancy rate of 17.9% (according to MSCI data) as at the 1st half of 2021 expected to rise further. This major class is expected to see its national average vacancy rate continue to climb in 2022, as many companies revise their office space needs down. Much has been made of the work from home (WFH) surge, and this is a key dampener of demand for office space. Perhaps most importantly, limited health budgets at provincial level are likely to perpetuate chronic human resource challenges at public healthcare facilities.

As lockdowns ease and economic activity trends towards"normal", more employees will go back to their offices. But we believe the level of full time office working won’t go back to the same levels as before the lockdowns, and as technology continues to improve, so the multi-decade trend towards greater remote work levels will resume (following the initial"back to the office" move after the lockdown spike). But people often overlook two other sources of pressure on demand for office space. The first is the normal recession effect, which caused a major drop in employment numbers in the office-bound sectors of the economy. This means that, even without any increase in remote work, there are less employees in these services sectors, which would normally imply less office space needed. Briefing MPs last year, the health department’s chief financial officer noted that because the infrastructure indirect grant had been cut by almost 20%, it would have an enormous impact on nationally managed programmes, especially infrastructure projects that would have to be postponed due to limited funding.

In addition, the trend towards improved utilisation of desk space seems to have picked up speed of late, with"hotelling" of desk space increasing in popularity."Hotelling" refers to a desk booking system, something FirstRand has recently implemented, meaning that employees either book a desk for a day or they don’t have one. Gone are the days therefore, when every employee had a desk reserved for themselves, meaning a large portion of desks standing empty much of the time. This sharing of desk space will further reduce the need in the coming years for office space. Partly offsetting the above-mention office space"demand dampeners" is social distancing measures in the office, which often requires companies to have lower density work space. Photo: Supplied 5.

But we believe that this is only a partial offset of the above, leaving the office market under pressure in 2022 with its average vacancy rate rising further. 6.   Retail was better in 2021 than in 2020, but further improvement likely to be harder going in 2022 with households still financially constrained. Retail property performance improved in 2021, but 2022 will likely make further improvement tough going. After underperforming the office market in the 2020 lockdown year, retail property made something of a comeback in 2021, and its total returns last year likely outperformed those of office property but underperformed those of industrial property. 6.

Sandwiched in between the industrial and office markets are where we expect retail property returns to stay in 2022. Real Household Disposable Income is projected to grow further, but at a very low rate of +0.2% in 2022, following a +2.8% growth rate in 2021. Real disposable income growth is expected to be constrained by very weak employment growth, companies often attempting to use labour productivity improvement instead of employing, as they rebuild balance sheets. As director of the Medical Research Council Professor Glenda Gray said during a department of health media briefing on Friday: This year will teach us whether we’re moving towards a more endemic nature of SARS-CoV-2, but as long as we have ongoing transmission, there’s the possibility of viral evolution, so it will be crucial for us to continue our excellent [genomic] surveillance.

Slightly higher average consumer inflation in 2022, compared with 2021, is expected, and forecast hikes in interest rates on outstanding debt would eat into disposable income further. On top of this, the long term rising trend in the effective tax rate on households is expected to continue, with adjustments for wage inflation-related tax bracket creep being only partial. In a financially constrained consumer environment, we would thus expect retail centres focused more on high frequency essentials, and less on luxuries and low frequency purchases, to outperform. This implies that we expect total returns on smaller sized convenience, neighbourhood and community retail centres to outperform the larger regional centre categories. 7. There has been talk of government’s TB recovery plans for many months, but those plans are ambitious enough or be implemented with the required urgency remains to be seen.

   Industrial Property Market to remain the outperformer. We expect the Industrial Property Market to remain the relative outperformer of the major commercial property classes. It is the most affordable of the three classes, and arguably the most adaptable, and this puts it at a relative advantage when the economy is under financial pressure. In addition, it appears set to benefit in the coming years from increased online retail focus. We do question how far this outperformance can extend, as manufacturing production is mediocre at best, and economy-wide inventory levels have declined significantly in recent years, so the traditional economic fundamentals related to industrial property are not overly strong. First, the rollout of 3HP (a newish and improved form of TB prevention therapy) will hopefully go to scale this year.

Nevertheless, the FNB Commercial Property Broker Surveys of recent quarters have shown the Industrial Market to indeed have been the strongest one through 2021, and the only one of the three markets where brokers perceive the average vacancy rate to be in significant decline. 8.   Residential rental market expected to see better times. The Residential Rental Market has had a very weak period in recent years. But 2022 is expected to see some strengthening. 8.

We know already from TPN tenant data that the percentage of tenants in good standing with their landlords regarding rental payments has recovered markedly following the 2020 lockdown dip. In addition, more recently, we have just started to see signs that the national average rental vacancy rate has possibly peaked and is beginning to move lower. TPN’s national average vacancy estimate has declined from a peak 13.31% in the 1st quarter of 2021 to 10.66% by the 3rd quarter, and average rental inflation increased mildly to +0. There are also huge inefficiencies in how and where we spend the little we have.

4% year-on-year in the 3rd quarter after having dipped into moderate negative territory in prior quarters. A decline in vacancies would provide some mild support for something of a rental inflation recovery, early hints of which we’ve already seen. We would expect a mild recovery in the Residential Rental Market in 2022 because of our expectation of further moderate interest rate hiking. Interest rate hiking typically curbs the 1st time buyer rush to buy homes that interest rate cutting brought from 2020 onward, that rate cut-driven buyer demand surge having helped to leave a"gaping hole" in the rental market. And with a greater portion of tenants’ income restored following the 2020 lockdown income shock, new household formation in the rental market may be ready to pick up some speed. The Treasury drafted the bill as a response to persistent procurement irregularities and their huge costs to the fiscus.

9.    Residential development market to peak. Despite the residential rental market expected to pick up moderately, it will likely still be well-supplied for 2022 at least. In addition, expected rising interest rates should likely cool home buyer demand. This leads to our expectation that we should see the number of residential units plans passed peak in the near term in 2022, and residential completions to follow suit with a mild lag. Asked for an update, national health department spokesperson Foster Mohale said the fund has been established and the department was busy finalising the directives which would give greater detail to the regulations published earlier.

2022 is thus expected to see the most recent"mini-surge" in residential building activity peak. 10.    Western Cape Region to be the outperformer economically and property-wise, as “semi-grants” continue to flock to those parts. With regard to major regions’ property market performance, we believe that the Western Cape province could be the likely outperformer in 2022. We base this expectation on the belief that the Western Cape’s ability to attract"semi-grant skills and purchasing power", crucial for economic growth, has recently been enhanced. Delivering the.

The Western Cape has been the most popular semigration destination for many years now, due to the perception of the province as having a great lifestyle coupled to significant economic opportunity. It has also been seen to be a region where provincial and local government is relatively well-run. And as time has passed, communication and information technology has enabled businesses and individuals to be more removed from the major economic hub of Gauteng. In 2021, the unrest and looting in KZN and Gauteng may have further enhanced the relative appeal of living and doing business in the Western Cape, a province that largely escaped that event. In addition,  the City of Cape Town is the only one of the major 6 metros that has emerged from the recent local government elections with its ruling party having a clear majority, and thus free of the uncertainty of coalition politics.

John Loos: property sector strategist at FNB Commercial. Views are the author's own.  We live in a world where facts and fiction get blurred In times of uncertainty you need journalism you can trust. For only R75 per month , you have access to a world of in-depth analyses, investigative journalism, top opinions and a range of features. Journalism strengthens democracy.

Invest in the future today. .