Commercial real estate tenants are under more financial pressure than before the Covid-19 pandemic.
- Commercial real estate is made up of the main asset classes of offices, commerce and industry.
- Data shows commercial property tenants are under more financial pressure than before the Covid-19 pandemic, with around a third behind on their rent payments.
- In addition, new commercial real estate loans granted fell by -24.31% over one year in the second quarter.
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Commercial property tenants are under more financial pressure than before the Covid-19 pandemic, with around a third behind on their rent payments.
Commercial real estate consists of three main categories of property – office, retail and industrial. According to data from credit bureau TPN, only 66.3% of commercial tenants were in good standing earlier this year compared to pre-lockdown levels, which often reached over 80%.
In addition, rising electricity and municipal costs are having a negative impact.
“While landlords can, in theory, recoup electricity and other costs from tenants, in practice tenants under financial pressure mean, in many cases, rents that need to come down,” says John Loos, Real Estate Strategist at FNB Commercial Property Finance.
Commercial real estate rents have fallen in real terms (therefore taking inflation into account) by -8.3% since 2014, according to data from the analysis firm MSCI.
Loos expects the electricity crisis and higher-than-inflation electricity rate increases to contribute to a near-term decline in commercial property net operating income in real terms, as well as real capital values. Net operating income has fallen in real terms by -19.9% since 2016.
In addition, new commercial mortgage loans granted decreased by -24.31% year on year in the second quarter. Loos expects interest rate hikes and the global recessionary environment to drive an even bigger drop in the near term.
The latest FNB survey of real estate brokers shows that sales in the three main categories of commercial properties are lower than at the start of this year. Loos points out that lower GDP growth implies weaker business performance and confidence, which in turn limits business expansion and new startups. This, in turn, dampens the demand for commercial real estate space.
South Africa’s electricity supply and cost issues have become increasingly important to the country’s commercial property market, he said. He even predicts that electricity promises to become a crucial source of competitive advantage – or disadvantage – for municipalities and regions, as companies increasingly seek out areas with reliable services.
Loos believes that in the short term this could lead to a ‘relative outperformance’ of commercial property in Cape Town, as it often keeps load shedding at lower levels than the rest of the country by procuring electricity from independent sources to complement Eskom.
The City of Johannesburg has also indicated that it plans to secure alternative power sources to improve reliability.