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Home » Industry News » Property Development Sector » Property Broker Survey –Market Balance Q2 2023

Property Broker Survey –Market Balance Q2 2023

Brokers perceived a market showing signs of a broad weakening in demand-supply balance. Only the Industrial market is perceived as having demand that exceeds supply, but with that margin diminishing, and the City of Cape Town metro  region shows the strongest  all-round demand-supply balance.

We continue with the 2nd quarter 2023 results of our FNB Commercial Property Broker Survey, which 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-Occupied” Property Segment, a pre-requisite in selecting broker respondents is that they 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 deal with questions relating to the perceived balance/imbalance between  demand and supply of properties being transacted  in the main markets. Market “strength” refers to a relatively strong demand level relative to supply, and vice versa for market “weakness”. These questions include estimates of average times of properties on the market prior to sale, as well as perceptions of whether  demand exceeds supply or vice versa.

Key themes that emerge from the results are:

     The Industrial Property Market is still perceived to be the strongest of the 3 major commercial property  sectors, i.e., Industrial, Retail and Office, albeit also showing signs of approaching weakening.

     A perceived oversupply of property on the market relative to demand remains in the Retail and Office property classes, but demand is perceived to exceed supply in the Industrial Market, albeit by a small and diminishing margin.

     In the area of Industrial Property, it appears to be the 3 coastal metros, i.e., eThekwini, Nelson Mandela Bay and Cape Town, where the relative market strength lies, especially eThekwini, while Gauteng’s Greater Johannesburg region remains the weakest by a significant margin.

     In the area of Office Property, all major metro  regions are perceived to be heavily oversupplied. The City of Cape Town, however, is perceived to be the least oversupplied of these.

     In the area of Retail Property, market strength differs vastly by metro region.

Demand is perceived to exceed supply significantly only in Cape Town, while at the other end of the metro spectrum is Greater Johannesburg with a very significant oversupply.

Average Time on the Market is perceived to have increased   in  2  out   of  3  major  commercial property classes.

From our residential market survey, we found the movement over time in the estimated average time of properties on the market prior to sale to be a useful indicator of changes in the  balance between  supply and  demand,  an increase in average  time of properties on the market prior to sale signaling a deteriorating  demand   relative  to  supply  and  vice versa.

We have attempted to apply this same questioning to our commercial property broker survey, splitting the survey by the 3 main property classes, namely Office, Industrial   and Retail,  and   splitting   it   further   by “Vacant Properties” vs “Occupied Properties”

The relative picture between  the 3 major property sectors is still one where brokers perceive the Industrial Property Market to be the strongest of the

3 classes, with an average time on the market for occupied industrial properties of 17.19 weeks being quicker than the 20.57 weeks in the case of retail and 27.4 weeks for office space.

Vacant industrial properties, too,  averaged  the shortest   average   time   on  the  market  of  the   3 segments  to the  tune  of 15.66 weeks, compared  to 19.66 weeks  in the  case  of retail  space  and  24.43 weeks  in  the  case  of office  properties,  in  the  2nd quarter 2023 survey.

In the FNB Commercial Property  Broker Survey, it is far more difficult to estimate average time on the market   than   is  the   case  in  the   FNB  Residential Property Estate Agent Survey. This is due to a far smaller sample size in the number of transactions, so from quarter to quarter the different groups of respondents can perceive average time quite differently, and the data moves can be more volatile.

However, in an easier-to-answer follow up question as to whether  the  past 6 months  has seen  average time of properties on the market increase, decrease or remain unchanged, brokers appear  better  able to assess the direction in average time as opposed to the actual average time itself. And, on average, it is only the  Industrial  Property  Market  where  brokers  still have a slight bias towards “diminishing average time on the market” (i.e., market strengthening) as the broader property market weakens.

     Perceptions  regarding the direction in “average time on market” over the past 6 months

The  follow up question to the  average  time  on the market estimate, is asking respondents  whether they believe that the average time on the market has increased, decreased  or stayed the same over the 6 months prior (i.e., since the 4th quarter of 2022).

Out of the responses we create an index by allocating a +1 score to an “increased” response,  a zero to an “unchanged” response and a negative -1 to a “declined” response.

The scale of the “Index for direction of change in time on the market over the past 6 months” is thus from +100 to -100. A score of +100 would imply that 100% of respondents  perceived an increase in time on the market over the past 6 months  (market weakening) and -100 would imply 100% of respondents  perceiving a decline, while a zero level would mean that  those providing an “increased” response  is equal to those responding with “decline”.

2 of the 3 property classes, i.e., Office and Retail, shifted, from negative readings in the prior quarter, to positive (market weakening) readings in the 2nd quarter  2023 survey. This implies that the aggregate of responses in these sectors points towards a lengthening (market demand-supply balance deteriorating) in average time of properties on the market compared to 6 months prior.

The  Office  Index  recorded  the  most  positive magnitude of +31.7, implying that on average the group of brokers surveyed perceived lengthening average time on the market over the 6 months, by a noticeable margin.

The Retail Index showed a less significant positive reading of +20.5 in the 2nd quarter.

The Industrial Property Market’s reading remained only slightly in negative territory, to the tune of -5.1, but this was significantly less in magnitude than the previous quarter’s -27.12. This the 10th consecutive quarter  in which  brokers  indicated  a  bias  towards declining average time on the market in the Industrial class, although the bias is no longer very significant, suggesting that this market may also be heading towards a lengthening average time on the market fairly soon.

Therefore, this survey question points to the emergence of an “increasing time on market” (market weakening) bias in 2 of the 3 sectors in the 2nd quarter of 2023 survey, while the Industrial Market’s negative reading has diminished in magnitude, pointing to a broad weakening in the commercial property market as rising interest rates and a slowing economy lead to weakening  investor  confidence  and  therefore demand.

Demand vs Supply Strength Perceptions

An additional supply-vs-demand question is asked, where the respondents  are asked whether they perceive “demand far exceeds supply” (option 1), “demand exceeds supply somewhat”  (option 2), the market is in balance” (option 3), “supply exceeds demand somewhat” (option 4) or “supply far exceeds demand” (Option 5).

The Office and Retail Property classes have significant portion of respondents  still pointing to “supply exceeding demand”, either “somewhat” or “far”, compared to those pointing to demand exceeding supply. The oversupply is particularly severe in the Office Market. The Industrial Market returns  a response where respondents  on average see demand exceeding supply in this market, i.e., 42.3% perceiving demand  to  exceed  supply  versus  33.9% perceiving supply exceeding demand  (23.7% perceiving a balance). By comparison, 52.3% still perceive supply to exceed demand  in Retail Property and a massive 73.4% in the case of the Office Property Market.

We create an index from the responses, option 1 receiving a score of +2, option 2 a +1 score, option 3 a zero score, option 4 a -1 score and option 5 a -2 score.

The index is thus on a scale of +200 to -200, where +200 would imply 100% of respondents  choosing option 1, and -200 meaning a 100% option 5 response.

In the 2nd     quarter of 2023 survey, the Industrial Property Market returned  a slightly positive +5.09 reading, which would imply that demand is perceived to mildly exceed supply. This is followed by Retail at a negative  -34.11 and  Office  recording  the weakest. -100.02.

In short, respondents  as a group still perceive the Retail  and  Office  markets  to  be  oversupplied,  the latter of the 2 markets “heavily” oversupplied but the Industrial Market still very slightly undersupplied relative to demand.

Provincial  Comparisons   –  Demand   vs  Supply Strength Perceptions

Due to smaller sample size at individual metro level, we are concerned  with volatility in the surveys, and therefore  opt to use a 2-quarter average of survey responses for the Demand-Supply Perceptions Indices for individual regions.

Examining the perceived market balance by major metro region for the 1st half of 2023, the Office Space survey points to Greater Joburg having the weakest demand  vs supply balance, with its index  being  the most negative at -132.76.

This reading is weaker than Tshwane (-116.67) Mandela Bay (-100) and eThekwini (-75.91), with Cape Town being the “least weak” of all the regions with a negative reading of -45.54.

In the Industrial Market, Greater Johannesburg is the weakest market, with a negative reading of -107.01, followed by Tshwane with a positive of +50. The strongest of the 5 were the 3 coastal metros, eThekwini with a particularly strong +122.22 positive reading, Cape Town with +88.33 and Nelson Mandela Bay +74.1.

In the area of Retail Property, the survey also points to the weakest demand-supply balance being in the Greater Johannesburg region, while Cape Town is the strongest.

Greater Johannesburg showed a negative reading of -152.45, followed  by eThekwini  with -66.67. Nelson Mandela  Bay was next with  -20, and Tshwane  with  -4.13.

City of Cape Town recorded a very significant positive reading of +112.5.

Conclusion

In short, perceptions regarding demand relative to supply remain weak in both the Office and Retail Markets, albeit less so in Retail than in Office. However, the perception is that Industrial Property Market investor demand exceeds supply on a national average basis, albeit by only a small and diminished magnitude.

In   2  of  the   3  property   classes,   i.e.,   Retail  and Industrial, the 2nd  quarter survey saw a weakening in the Demand-Supply Perception Indices. And In 2 out of  3  property  classes,  i.e.,  Office  and  `Retail,  the survey saw a bias in broker perceptions towards a lengthening average time of properties on the market prior to sale, while the perception of decreasing average time on market was receding in the industrial Market.

This survey component therefore  generally points towards signs of commercial market weakening, and indeed we believe that further such weakening should be expected in the near term.

We have  seen  the  survey’s  market  activity ratings weaken mildly in all 3 markets in the 2nd  quarter,  so we would expect the market demand-supply balances to weaken too.

This expectation is also based on the FNB forecast of significantly slower economic growth in 2023, compared to last year, with the full impact of very significant recent interest rate hikes (475 basis points’ worth since late-2021) and a slower world economy still to be felt. And ongoing electricity load shedding has added to the list of cost and economic pressures for commercial property. These factors are expected to further weaken investor demand for commercial property in the near term.

The Industrial Property Market remains the strongest one in terms of demand-supply balance, followed by Retail, with the  Office Market being the weakest.  A weak Manufacturing Sector persists, however, while economy-wide inventory accumulation will likely remain weak in a recessionary economy in 2023. The Industrial  Property  Market,  therefore,   also  has  its own pressures too, even though it has benefited relatively from changes relating to a gearing up for greater online retail, and all the warehousing and logistics requirements associated with this.

The Office Market remains the property class with the most  significant  longer-term  challenges.  Not  only does weak employment growth in key services sectors hamper   its  demand   growth.  “Elevated”   levels  of remote  working  and  improved desk  utilization (through greater hot desking and hoteling) compared to pre-lockdown levels also constrain demand for office space,  and  thus  the  appeal  of this  property class.

High office  vacancy rates  nationally  18.5% in 2022 according to MSCI data) tell only a part of the weak story. Within many currently tenanted offices, daily attendance rates are still noticeably lower than they were  in pre-lockdown  days, and one would think  it only  a  matter   of  time  before  certain  companies reduce their office space requirements, exerting further pressure on the performance of this property class.

A  portion  of the  investor  demand  for this  property type  may  thus  be  for  repurposing purposes, residential  repurposing  being  popular,  because  the need for office space promises to remain subdued in the near term.

At a major metro region level, the 1st half of 2023 continued to reflect the key regional theme  in South Africa of late, i.e., that both business and household sentiment is the most positive in the Western Cape region (as seen in strong skilled labour “semi-gration numbers to that region), and that this region is likely to be an economic and property market outperformer in the SA context.

The City of Cape Town Metro continues to return the strongest  perceived demand-supply balances in 2 of the 3 major commercial property markets, i.e., Office and Retail, while returning the 2nd  strongest  reading in  Industrial   Property.   It   also   has  also   had  the strongest residential market recently, further underlining the province’s popularity.

The Greater Joburg region returned  the weakest demand-supply  readings  in all 3 markets,  as it  has done for some time.

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