Commercial Property benefits from recent Economic strength, but soft patch may be approaching

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John Loss: FNB Property Sector Strategist John Loss: FNB Property Sector Strategist

Through the Summer Quarters, FNB’s All Commercial Property Performance Indices, compiled from its valuations data (heavily pertaining to the smaller “owner occupied segment”), have pointed to something of a stronger period in the commercial property sector.

The past 4 quarters have seen the All Commercial Property average price growth rate accelerating, appearing to track the direction of the FNB Residential Property Price Index quite well.

The past 2 quarters have also seen a resumption of decline in the FNB All Commercial Vacancy Rate Index, after a previous rising trend through last winter, while capitalisation rates are believed by FNB’s values to have declined further. 

Investment Property Databank (IPD) data for 2011, released in March, is supportive of the FNB indications of a late-2011 improvement, with higher total

Property returns recorded in the entire year compared to the IPD’s earlier 1st half 2011 update, implying a stronger 2nd half.

However, whereas 2011 saw improving commercial property fortunes as the year progressed, 2012 may prove to be the opposite, with some global and domestic economic indicators starting to hint at a “softer patch” approaching.

A recent decline in the JP Morgan All Industry Purchasing Managers Index is telling in this regard, while organisations such as the IMF, the World Bank, the UN and indeed our own Reserve Bank had started the year projecting slower overall economic growth for 2012 compared to 2011. Recession talk in the troubled Europe has increased in recent weeks, while US economic growth had already

slowed mildly in the 1st quarter of 2012 compared to the previous quarter.

Domestically, we haven’t yet felt too much in the way of the impact of a creaking global economy. However, SA’s own Manufacturing Purchasing Managers Index has declined for 2 consecutive months in March and April, suggesting slowing manufacturing output growth. Accompanying this has been a mild slowing in month-on-month FNB house price growth in the same 2 months, an early hint that the economy may be starting to cool at least in the residential component already.

Real retail sales growth was still strong as at the 1st quarter, with the year-on year growth rate measuring 6.9% for the 3 months to February. However, this is slightly down from its peak 7.9% year-on-year growth rate for the final 3 months of 2011, a further early hint of moderation in the economy.

On the interest rate side, in recent days we have seen government long bond yields just a slight bit off their best levels as global jitters heighten and some capital flows to “safe havens”. The impact of this has also been seen in a weaker rand moving weaker than USDZAR8.00 in recent days.

A combination of slowing economy, which could once again raise vacancy rates, and a rise in long bond yields as global economic jitters are renewed, could be expected to see capitalisation rates rise mildly towards the 2nd half of the year, exerting downward pressure on real commercial property values after a recent period of relative strength.



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