John Loos
Real Gross Domestic Product (GDP) data for the 4th quarter of 2023, released today by StatsSA, completed the full 2023 picture of what was a weak economic year, and likely a weaker commercial property year too, as a result..
Real GDP growth, on a quarter-on-quarter seasonally adjusted basis, grew by a mere 0,1%, after a previous quarter’s contraction of -0,2%.
This translates into a 2023 annual growth rate of only 0,6%, slower than the 2022 rate of 1,9%, with the better growth quarters of 2023 having been in the 1st half of the year.
For the commercial property market, the weak data suggests to us that commercial property returns may have weakened further in the 2nd half of last year. MSCI half-yearly data for the 1st half of 2023 had already shown total All Property Returns (income return + capital growth) weakening to 3,5%, from 5% in the 2nd half of 2022, and ongoing economic growth weakness in the 2nd half of 2023 implies the possibility of further weakening in total returns.
The recent GDP growth rate Is insufficient to boost commercial property valuations growth back into positive “real” territory, i.e., to a rate where growth in property values beats general inflation. Since 2015, real (inflation-adjusted) commercial property values have been on a declining trend, and we believe that 2023 was likely another year of such real decline, given this weak economic end to the year, coupled with relatively high interest rates after 475 basis points of hiking by the SARB since late-2021.
Examining growth rates in the GVA (Gross Value Added) of the 3 economic sectors most strongly linked to key commercial property sectors, in the 4th quarter of 2023, there was little to enthuse about. Late in 2023. Manufacturing GVA, strongly linked to industrial property demand, grew positively by 0,5%, perhaps supportive of the expectation that Industrial Property remained the relative outperformer of the 3 major commercial property classes. We say that because Retail and Wholesale Trade, Catering and Accommodation GVA, highly influential on retail property demand, declined significantly by -2,9%, which doesn’t bode well for retail property. Finance, Real Estate and Business Services GVA did grow by 0,6% in the 4th quarter. However, it is this sector’s employment growth rate as opposed to its GVA that is more influential on office demand. And given its ability to consistently achieve productivity improvements, it is unlikely that this lowly GVA growth rate would translate into any noteworthy employment growth in the sector.
The 3 most relevant sector thus point to a weak economic situation for all 3 major commercial property sectors (Industrial, Retail and Office), perhaps best for the Industrial Property Sector by a small margin.
Examining the expenditure side of GDP, real residential fixed capital formation declined by -3,9% quarter on quarter in the 4th quarter of 2023, its 3rd consecutive quarter of decline, reflecting the interest rate-driven slowdown in residential demand . This 4th quarter reading was -18,3% down on the final quarter of 2019, the pre-Covid-19 level.
Real Non-residential fixed capital formation data surprised slightly by growing positively in the 4th quarter of 2023 to the tune of +1,9%, after 2 prior quarters of decline. But one shouldn’t be fooled, this component of capital formation remains extremely weak, being -39,2% down on the 4th quarter of 2019 level, its pre-lockdown level. Commercial property fixed investment thus remains extremely weak compared to pre-lockdown days.
In short, 2023 proved to be a weaker economic growth year than 2022, and it is likely that overall commercial property returns weakened on 2022, and that average real (inflation-adjusted) capital value declined in line with net operating income growth slowing, and also declining in real inflation-adjusted terms.
John Loos, is a Property Sector Strategist at FNB Commercial Property Finance. He writes in his personal capacity.
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