Resilience: A slow Path
To Performance Recovery


During 2020 we all experienced high levels of uncertainty affecting every aspect of our lives – the biggest driver of sentiment change came as a result of the unprecedented rapid development of vaccines, making global economic recovery a more realistic prospect for H2/2021 and onwards.

The IMF’s April 2021 World Economic Outlook estimates 6% economic growth in 2021 and 4.4% in 2022 following a contraction of -3.3% in 2020, compared to an earlier estimate of -4.4% as at October 2020, indicative of better than expected economic performance as Lockdowns eased during the second half of 2020. 2021’s stronger growth expectations are driven by vaccine-led recovery in H2:2021. Economic recovery remains divergent as countries and sectors adapt to Lockdown induced disruptions and the extent of policy support received.  The IMF has also uplifted its expectation for GDP growth in South Africa to 3.1% GDP growth for 2021 and 2% for 2022. Other forecasts for SA’s 2021 GDP growth rate range from 3.1 by Absa’s Economic Research Unit to 3.8% by the South African Reserve Bank. Overall the economic outlook is significantly more optimistic than this time last year.

The MSCI South Africa December 2020 Property Index delivered a total return of -3.0%; comprising -9.6% capital growth and 7.2% income return, reflecting the impact that the early stages of the COVID-19 induced national lockdown had on the commercial property sector. MSCI’s property index is based on open market valuations; i.e. price estimates based on relevant market information and recent transaction evidence. The negative return was primarily driven by adverse asset valuations reflecting an expectation of lower future income. Income return, while positive, was constrained by comparatively lower rental collections due to, inter alia, COVID rental discounts offered by commercial landlords coupled with negative rental reversions and higher vacancies.

Rental collections for Real Estate Investment Trust (REITs) commercial tenants have improved, up from a low of 65% in April 2020 to 107% by December 2020. While the South African office sector continues to struggle with high vacancies, office tenants proved to be more resilient than the market anticipated. This is largely owing to the structure of the leases and the fact that most office occupiers would have continued to fulfil their rental obligations despite the large sections of the workforce working from home.


Figure 1: Average rental collections for select JSE REITs

The most impacted sectors in South Africa and abroad have been tourism and retail related. This is reflected in the hotel sector’s return of -10.7% and retail’s -4.4%. As expected, the destination style super regional centres were most negatively impacted, achieving returns of -9.3% (-5.0% for Super Regional and Regional centres combined). Shopper preference for open-air style Neighbourhood, Community and Convenience centres, which offer a higher proportion of essential goods and services, is shown in a positive return of 0.8% (and 6.0% for Big Box Retail). A reversal in the spread of total returns between smaller retail centres and large-format shopping centres shown in Figure 1  demonstrates this preference.


Figure 1: A comparison of total returns for convenience and large format shopping centres  - Source: Absa CPF B&R, MSCI

The COVID-19 pandemic has also had nuanced geographic impacts within the retail property sector. Retail total returns were strong in Rural, Peri-Urban and Inner Cities, where the tenant mix is biased towards essential goods and services.


Figure 2: A comparison of retail segment and location  - Source: Absa CPF BD&R, MSCI

Office vacancies continue on an upward trend, with vacancies at 16.1% (floor-space) as at December 2020 ahead of the 12.8% that was registered in the prior year. However, rental collections in the sector remain relatively strong due to continued operations in key professional service sectors such as Finance, Real Estate and Business Services, with large sections of tenants meeting their rental commitments in full. Consequently, the office sector delivered a total return of -1.8% for the year to December 2020, ahead of the All Property sector average.

The residential sector performed in line with the overall property sector at _-3%  driven by higher vacancies and lower rental collection levels, particularly in Q2 and recovering towards the end of 2020. Interestingly sales of apartments and houses in the range up to R1.5m performed strongly off the back of lower interest rates.

Globally, the strength of the industrial sector is supported by a shift to modern big box distribution and warehousing centers, as corporates re-assess their supply chains, look for greater efficiencies and in support of online retail. This trend is also evident in South Africa, where the sector posted positive total return of 1.1% (with distribution centres achieving a positive return of 5.1%).

As Lockdown restrictions are progressively eased, the data shows continued improvement in rental collections across all the property segments up to Q4:2020. We expect this trend to continue as economic activity returns to full capacity in a new operating environment.

The MSCI South Africa December 2020 Property Index brings into sharp focus the impact that COVID-19 has had on the South African Commercial Property sector. COVID-19 has been the most significant market risk event since the inception of the MSCI Property indices approximately 25 years ago.  The results show that strong geographical and segment diversification holds real estate investors in good stead.

As the effects of the pandemic continue to evolve, the recovery of the real estate market is expected to be in line with that of the economy due to the strong correlation between real estate market performance and the economy.

Related Articles


Financial Mail Top Analyst Awards 2024

The annual Financial Mail Top Analyst Awards, in partnership with Iress and JSE, awards South Africa’s top analysts in the institutional stockbroking industry.


Financial Mail Top Analyst Awards 2023

The annual Financial Mail Top Analyst Awards, in partnership with Iress and JSE, awards South Africa’s top analysts in the institutional stockbroking industry.


A Different Kind of Debt Instrument

The South African government recently issued a new floating-rate note. What does it offer, and what does the market reaction reveal about the state of local credit markets?