South African investment
grade property delivers first
negative total return

The bi-annual index shows that in the half-year ended June 2020, South African investment-grade property delivered its first negative total return on record in the face of the COVID-19 pandemic. The ungeared total return of -1.7% was down from 3.7% recorded for the second half of 2019.

The nationwide lockdown paused most economic activity and weighed on occupiers’ ability to service their rental obligations. However, muted growth was characteristic of the pre-pandemic economy. The pandemic served to accelerate and not exacerbate a downward trend in capital growth and income returns. Capital growth fell from -0.1% for the half-year to June 2019 to -5.2% for the half-year to June 2020.

At a sector level, industrial property was the top performer during the first half of 2020 with a total return of 0.9%. All other sectors delivered negative total returns with hotel assets worst affected at -6.9% as the lockdown and associated travel restriction had an immediate impact on the sector.

The residential and office property sectors produced total returns of -1.2% and -0.9% respectively, while the retail sector underperformed with a total return of -2.8% for the six-month period.

While all sectors experienced declining net income growth, the impact of the pandemic has been particularly severe on retail assets. Super regional malls (centres with a lettable floor area exceeding 100 000 square meters) saw their net operating income decline by 23.7% when compared to the previous six-month period.

At an overall level, the South African commercial property vacancy rate increased by 60 basis points during the six months to end at 7.4%. This is above the 6.6% recorded in 2011 as occupancy rates weakened in the aftermath of the global financial crisis.

This is the first representative piece of evidence showing the impact of COVID-19 on commercial property returns. While the results show an unprecedented decline in the total return for all properties within the index overall, the impact on ungeared total returns has not been as severe as has been seen on the general economy. What remains to be seen are the long-term effects of the pandemic on the commercial property market.