COMMERCIAL PROPERTY INSIGHTS | 30 OCTOBER 2020

South African investment
grade property delivers first
negative total return

SHARE
Facebook
Twitter

MSCI, a leading provider of investment decision support tools worldwide, including indexes, portfolio risk and performance analytics and ESG research, recently released the MSCI South Africa Bi-Annual Property Index for June 2020, proudly sponsored by Absa Commercial Property Finance. The index is based on asset-level data collected from a sample of 2 397 properties across 23 portfolios with a total capital value of R393.5 billion at the end of June 2020. This represents approximately two-thirds of professionally managed investment property in South Africa.

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.

Related Articles

Commercial Property Insights

East African property is on the rise

Despite the challenging economic environment experienced over the last three years, the East African property market is one that appears to be offering some exciting potential for patient investors. While Emerging Market property faces certain headwinds including inflationary pressures, rising global interest rates and liquidity squeezes, there are reasons to feel optimistic about the sector as a whole.

EVENT

Expanding skywards requires growth experts

Future-proof organisation need sustainable solutions. This is why we’re proud to sponsor this year’s The East Africa Property Investment (EAPI) Summit. This year’s event marks the first in-person conference of industry leaders in two and a half years. It’ll feature keynote addresses, interactive panel discussions, case studies and formal and informal networking opportunities.

Commercial Property Insights

2021 MSCI South Africa Annual Property Index returns show the sector recovered to a positive return of 5.3%

The IMF’s January 2022 World Economic Outlook forecasts global growth to moderate from an estimated 5.9% in 2021 to 4.4% and 3.8% in 2022 and 2023, respectively. This outlook was produced early in the first quarter and had not accounted for the outbreak of the conflict between Russian and Ukraine. The IMF further forecasts South Africa’s economic growth to decrease from 4.9% to 1.9% from 2021 to 2022 and to further decline to 1.4% in 2023. However, Absa Economic Research Unit forecasts moderately higher expectations with growth of 2.1% in 2022 and 1.7% in 2023.