14 May 2020
Klaus-Dieter Kaempfer, Head: Commercial Property and Equity Investments, Absa
The COVID-19 outbreak has had a systemic impact on the global economy, affecting many asset classes adversely across many geographies. The International Monetary Fund (IMF) recently published projections which indicated that global growth will decelerate by -3.0% in 2020 in line with a base-line scenario that assumes that the pandemic will fade in the second half of the year, as containment measures are gradually unwound.
Similarly, the organisation for Economic Co-operation and Development (OECD) says over the short-term, the prospects for the global economy are grim, with a recession expected in the first three quarters of 2020. Closer to home, the South African Reserve Bank has downgraded its 2020 GDP outlook for South Africa from +0.2%, as communicated on the 19th March 2020, to -5.8% – the latter as communicated on the 14th of April 2020. Our Absa Economic Research team expects that some of the sectors expected to be worst affected are catering and hotels, construction, motor trade, manufacturing and mining.
From a commercial property finance perspective, COVID-19 comes at a time where the industry has experienced solid growth of around 9% for the year ending December 2019. In Rand value terms, this was equivalent to R35bn in net growth of loans extended by the industry. In line with a muted real estate sector performance, the commercial property finance sector expected to experience a softening in growth rates in Q1 and Q2 of 2020. In the year-to-date period ending in February 2020, the industry grew net loans by R2.6bn compared to 3.8bn achieved in the same period of 2019.
The national lockdown period announced on 23 March 2020, and now since lowered a notch lower to Level 4, is expected to have a negative impact on retailers who are not deemed to provide essential services. Consequently, retail landlords are remodeling their cash-flow forecasts in light of expected weaker rental collections. In an effort to mitigate the negative impact of the current market disruption, property sector leaders, through a forum called “The Property Industry Group”, have announced an industry-wide assistance and relief package for retail tenants that are hardest hit by complying with South Africa’s lockdown regulations in the face of the COVID-19 pandemic.
Landlords will, on a case-by-case basis, also consider providing relief for office, industrial and hospitality tenants where the lockdown severely impacted the tenant and where it is justified.
High vacancy rates (11% as at Q3:2019 according to the SAPOA Office vacancy survey), coupled with diminishing business confidence has seen the office sector perform poorly in recent years. A long-term trend to move to increased levels of remote working will likely accelerate as a result of COVID-19. Much of the new office space coming onto the market has been tenant driven, with corporates relocating to new office space that is more aligned to the evolving requirements of their businesses, such as flexible space, green credentials and lower operating costs.
In contrast to the office and retail sectors where, at a macro level, supply may have overshot demand, the industrial sector appears to be largely in sync in terms of the supply and demand balance. The impact of COVID-19 on the industrial property sector may well have some positive developments as manufacturers and retailers consider the long-term implications of the pandemic on their supply chains.
There may be a greater need for supply chain diversification in order to improve resilience against future disruptions such as COVID-19. The move to online shopping, especially for groceries, could also accelerate demand for warehousing space.
Absa Commercial Property Finance’s response to the market disruption caused by COVID-19 is informed by our awareness of our responsibilities as a large lender in South Africa and the wide-ranging implications that our decisions may have on the broader economy.
We remain committed partners to our clients; and are pro-actively engaging with our clients to understand liquidity requirements as they emerge and find solutions that work. We understand that each client is unique, with unique operating circumstances; as such, the solutions adopted will be appropriate in line with the specific circumstances and challenges faced by each client.