Rapid recovery of private sector building activity unlikely



22-04-2021
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Moneyweb
Source

The significant and long-term impact of the Covid-19 pandemic and associated lockdowns on the office market, together with high office vacancy rates and poor rental payment rates, appear likely to stifle any rapid recovery of private sector building activity.



Construction market intelligence firm Industry Insight reports that private sector building activity has now slowed to its lowest level since 1994.Credit bureau Tenant Profile Network (TPN) said the recovery in commercial tenant rental payment performance continued in the fourth quarter of 2020 following the sharp Covid-19-related lockdown drop in the second quarter of 2020



It said the percentage of commercial tenants in good standing with landlords improved to 61.62% in the fourth quarter of 2020 from a lowly 50.36% in the second quarter of 2020.



Tenants in good standing include tenants who paid on time, paid in the grace period and paid late.



However, TPN said the current level of tenants in good standing remains well below the pre-lockdown level of 77.85% recorded in the first quarter of 2020 and even further below the 83.56% high reached at a stage in 2012 before the onset of multi-year economic growth stagnation.



TPN added that 26.09% of total tenants made partial rental payments and 12.29% did not pay at all.



Pressure-influenced selling



FNB’s commercial property broker survey results for the first quarter of 2021 revealed that 65.5% of owner occupiers of commercial property were perceived to be selling or relocating because of financial constraints or pressures, by far the biggest single driver of the selling decision.



FNB said this level of financial-constraints or pressure-influenced selling was 22.1 percentage points higher than the 43.1% recorded in the first quarter of 2020, with 72% of respondents saying “supply far exceeds demand” for office space.



Industry Insight also reports that demand for office space remains at unprecedented weak levels.



It said the Covid-19 pandemic has forced many companies to experiment with remote working potentially on a more permanent basis and anecdotally it has seen from the property funds that some of their biggest tenants are looking to downsize or sub-let parts of their existing office space.



SA Property Owners Association (Sapoa) CEO Neil Gopal said the latest Sapoa office vacancy survey revealed that office vacancy rates increased to 14.2% in the first quarter of 2021 as the fallout from the Covid-19 pandemic continues.



Gopal said this 2.6% increase in the past year translates to more than 500 000m2 of office space becoming vacant since March 2020.



He said the upward trend in vacancy rates could persist in the short to medium term because many occupiers will only reconsider the extent of their physical office presence when leases come up for renewal.



Rental trends



Gopal added that overall asking rental growth remained below inflation at 1.8% year on year but anecdotal evidence suggests that some deals are being done at substantial discounts to asking rentals.



In addition, office development activity was at an all-time low in the first quarter of 2021, he said.



“In the short to medium term, increasing vacancy appears inevitable. The fact that South Africa entered the Covid-19 era with an oversupply of office space further aggravated the situation.



“While deals are still being done, the level of oversupply in the market could mean we could be several years away from a single-digit office vacancy rate.



“To get back down to a 9% vacancy rate would require letting just shy of one million square meters. That is the equivalent of 2 000 tenants each taking up 500m2,” he said.



Industry Insight said the non-residential construction industry has been one of the hardest hit sectors in the economy, with the demand for both office space and shopping centres at all-time lows, and the property market also struggling.



Statistics South Africa reported in February 2021 another contraction in private sector formal building activity, with the square metres of buildings completed contracting by 36.2% compared to the same month last year.



Industry Insight said this is about 300 000m2 less building in the month, with just under 540 000m2 completed compared to 840 000m2 in the same month last year.



“Building has consistently slowed and this marks the 16th consecutive month of year-on-year contractions.



“Over the last year, there have been a staggering 50.6% less square metres completed.



“There have been collapses in both the residential housing and non-residential commercial markets over the last year, with plans reported as completed down by 50.3% and 45.9% respectively.



“This means that over the last 12-month period, activity levels have roughly halved compared to the previous 12-month period [March 2019 to February 2020].



“This is an unbelievable collapse in private sector formal building activity despite interest rates being at record lows,” it said.



Industry Insight said the outlook remains bleak, with huge contractions in demand for private sector buildings in all categories.



A chink of light



However, it said there was some positive data, with building plans approved by municipalities – a leading indicator – increasing by 17.3% in February 2021.



It said this was driven by both the housing and commercial market but most notably by the more than 300 000m2 of industrial space approved, the highest level approved since last 2008.



There was also 47% more square metres of office space and 12.7% more square metres of retail building approved, it said.



However, Industry Insight said office space “is coming off quite a low base, with just 21 000m2 approved, so we would not read too much into it”.



“The retail space approved is more robust, with just under 70 000m2 approved.”

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