Despite landlords giving commercial tenants about R3 billion in rent relief between April and June 2020 in an attempt to soften the impact of the Covid-19 lockdown, rental arrears are continuing to grow.
The latest commercial rental monitor published by TPN Credit Bureau reveals that the recovery in the non-payment tenant category appears to have stalled at about 12%.
TPN said commercial tenants in good standing nationally improved to 62.5% in the first quarter of 2021, from 61.62% in the fourth quarter of 2020 and a lowly 50.36% in the second quarter of 2020.
However, this is still significantly lower than the pre-Covid-19 lockdown level, when 77.85% of commercial tenants were in good standing in the first quarter of 2020 and the last decade’s high of 83.56% reached during 2012.
The classification of tenants in good standing includes tenants who paid on time (45.89%), in the grace period (4.56%) and paid late (12.07%) and indicates that their account balance is fully settled and no arrears balance is carried forward.
Pace of recovery
TPN Credit Bureau CEO Michelle Dickens said the commercial tenant recovery ticked up in the first quarter of 2021 but at a slower pace than in the second half of 2020.
The percentage of tenants who did not pay at all increased to 12.83% in the first quarter of 2021 from 12.29% in the previous quarter, after peaking at 19.73% in the second quarter of 2020.
However, the percentage of delinquent commercial tenants nationally, which also includes tenants who made partial rental payments, decreased to 37.48% in the first quarter of this year from 38.38% in the fourth quarter of 2020.
The percentage of commercial tenants who made partial payments improved to 24.65% from 26.09% in the same period.
Lockdown impact reverberating
Dickens said the hard lockdown in the second quarter of 2020 left landlords reeling, with one in two tenants crashing into delinquency and the did-not-pay category increasing from between 6% and 7% prior to the pandemic to one in five tenants being unable to pay.
“Landlords gave a whopping R3 billion in rent relief during April to June 2020, significantly reducing the number of tenants who were more than three months in arrears with their rent. Fast-forward nine months, R3 billion [has been] swallowed up and arrears continue to grow,” she said.
Dickens said the recovery in the commercial property sector has been the most significant in the retail sector, with 61% of tenants in good standing in the first quarter of this year.
This is the same level as in the fourth quarter of 2020, but a significant improvement on the 40% of retail tenants in good standing in May 2020.
The percentage of office tenants in good standing deteriorated to 69% in the first quarter of 2021 from 71% in the previous quarter, while that of industrial tenants improved marginally to 66% from 65% in the same period.
Business recovery needed
Dickens stressed that a commercial real estate recovery relies on business recovery.
She said constraints to business productivity as a consequence of work-from-home, coupled with home schooling as schools remained partially open, particularly in the public school environment, has been significant.
“Curfews and electricity constraints are additional factors limiting recovery. The broader vaccination rollout to the education market and the over-50 age group is certainly a step in the right direction,” she said.
Outlook for listed property sector
Despite the financial stress being experienced by tenants, which is negatively impacting landlords, South Africa’s real estate investment trust (Reit) or listed property sector is continuing its 2021 rally and is now about 23% up since the start of the year.
Craig Smith, head of Anchor Stockbrokers, told Moneyweb last week that it is very probable that the listed property sector ends this year “in the green” given that it is already up close to 20% year-to-date.
Smith said their base case at the beginning of the year included estimated total returns for the full year of between 20% and 15% for 2021 and “year-to-date the sector has outperformed relative to our expectations”.
John Loos, a property sector strategist at FNB Commercial, said on Monday there has been some improvement in the commercial property market this year because interest rates have remained low and the economy is improving.
He said 2021 will be a better year for the commercial property market than 2020 but there will be “no fireworks”.
“A recovery is still a good number of years away and will depend on structural reforms and economic growth,” he said.
Loos said the 4% to 5% GDP growth anticipated for South Africa this year will be insufficient to turn the commercial property market around because it follows the -7% GDP growth in 2020 and means the economy will still not be back to 2019 levels.
He said the commercial property market will bumble along and be mediocre for a number of years, adding that structural and policy reforms “won’t be smooth sailing and come with a lot of resistance”.
The results of the latest FNB commercial property broker survey, released on Monday, reflect a similar slow recovery in the sector as highlighted by TPN.
It revealed that financial constraints/pressures is still by far perceived to be the most important reason for owner-occupiers selling or relocating, at 55.37% in the second quarter of this year.
This is noticeably lower than the 65.2% in the previous quarter but still 12.3 percentage points higher than the 43.1% recorded in the pre-Covid-19 lockdown quarter.
The report added that the second quarter survey points to financial pressure among property owner-occupiers remaining high but did point to some improvement.
Listen to Suren Naidoo’s interview with Craig Smith of Anchor Stockbrokers (or read the highlights here):