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Level of commercial property tenants in good standing remains below pre-lockdown levels

A ‘full recovery’ for the economy to pre-Covid-19 GDP levels – and the tenant population – will possibly take years: FNB property sector strategist John Loos.
Commercial buildings and office property stand on the city skyline as night falls, as seen from the 50th floor of the Carlton Centre, in Johannesburg. Image: Waldo Swiegers/Bloomberg

The percentage of commercial property tenants in good standing in the third quarter of 2020 remained below pre-Covid-19 lockdown levels and is still too weak to drive the demand growth for space necessary to turn around the rising vacancy rate trend, according to credit bureau TPN.

For a tenant to be classified as being in good standing, they either have to be fully paid up, paid late or in a grace period.

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TPN reported that the percentage of total tenants that are in good standing with their landlords with regards to rental payments increased mildly to 56.19% in the third quarter of 2020 from the 50.36% low in the second quarter of 2020.

While this represented some improvement from the second quarter, the credit bureau said the third quarter level remains very weak compared to the pre-Covid-19 lockdown level of 77.85% in the first quarter of 2020.

FNB’s property sector strategist John Loos said the catalyst for the big drop in the percentage of tenants in good standing was the Covid-19 lockdown in the second quarter of 2020.

However, Loos said the multi-year economic stagnation in the years prior to 2020 “is a key contributor to the current tenant payment weakness”.

He said the economic stagnation prior to the lockdown meant many tenants entered lockdown in an already financially pressured condition, limiting their ability to survive the lockdown period with little or no income.

Loos added that the lack of further monthly tenant payment improvement in the office and industrial property sectors in September and October 2020 is starting to indicate that a “full recovery” for the economy to pre-Covid-19 GDP levels, and therefore also for the tenant population, will probably take some time and “possibly not months but years”.

“A portion of the economy’s production capacity has likely shut down permanently as a result of the severe economic shock from lockdown.

“This likely means that a portion of tenants are still experiencing sales revenues below the pre-Covid-19 levels due to a smaller economy, with smaller production capacity and lower demand, and this may not be sufficient to sustain them. One can see certain businesses surviving lockdown but bargaining on a speedy return to ‘full’ revenue levels in order to survive.

“A partial recovery in sales revenues in certain instances may be insufficient for certain businesses to continue to survive and pay their rental bills, and then one may see a second dip in both rental tenant performance as well as the economy,” he said.

However, Loos said it is too early to draw conclusions regarding a second dip.

TPN said the retail sector was the worst affected by the Covid-19 lockdown, with the percentage of retail tenants in good standing dropping to a very low 41% in April 2020 during the middle of lockdown.

It said the percentage of industrial property tenants in good standing declined to 53% in May 2020 while the impact of the Covid-19 lockdown on office tenants was the smallest of the three major property sectors, with the percentage of office tenants in good standing only dropping to 60% in May 2020.

Loos warned that more recent monthly data is beginning to suggest the possibility of lagged impacts of “the sharp lockdown-induced economic contraction still to come”.

He added that the percentage of retail tenants in good standing continued to increase off its low base to 55% by October 2020 but that there was a lack of improvement in September and October 2020 in the rental performance of office and industrial tenants.

The percentage of office tenants in good standing remained unchanged in September and October from the 66% level achieved in August 2020 while the percentage of industrial tenants in good standing declined slightly to 65% in October from 66% in September.

In February 2020, 75% of office tenants and 70% of industrial tenants were in good standing.

The Rode Report on the state of the property market in the fourth quarter of 2020 revealed that decentralised office vacancy rates increased to an average of 12.3% in the third quarter of 2020 from 11.7% in the second quarter, the highest level since 2003.

The report said office vacancy rates averaged 11.7% in the first three quarters of 2020, which is significantly higher than the 10.5% average for the 2019 calendar year – and are moving further away from their 8% long-term average.

It added that data indicated that national industrial property vacancy rates were lower than 5% in the fourth quarter of 2020 and rising from a low level.

“Vacancy rates for office, retail and residential property have seen larger increases this year, which showcases the resilience of industrial property in these trying times. No doubt, the better performance of industrial properties can be attributed to its largely non‐speculative nature,” it said.

The report stressed that the key driver of industrial property is the performance of the manufacturing and retail sectors, which both, as expected. did better in the third quarter after the torrid second quarter.

“The manufacturing sector underpins the demand for industrial space for manufacturing production purposes, whereas the retail sector underpins the demand for warehouse space and manufacturing,” the report said.

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In 2021,the level of commercial property tenants in good standing will drop even further.

So, in February 2020, before the lock-down, between a quarter and a third of tenants were not in good standing. In other words, they were in distress already. How’s that possible, given the fine management of the economy by the ANC regime for the past quarter century?

Over the next 6-12 months Sandton is going to empty out even further. It’s as if these people in their ivory towers are too focused on their numbers and not what is actually going on, data is great but it doesnt always show the full reality.

With Businesses closing and those who can’t pay, I believe the “bust” is coming.

End of comments.

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