South African
property news

What the shrinking economy means to non-residential property

Friday, March 13, 2009

During the fourth quarter of 2008, real GDP contracted by nearly 2% (annualized quarter-on-quarter), and the outlook for 2009 continues to look bleak. And you had better not expect any growth in 2009.

A weak economy could of course result in poor or stagnating market rental growth – one of the crucial drivers of value.

The office and industrial sectors are in the up leg of a long cycle, which in itself has incorporated more than one business cycle. Now that we’re into a business-cycle recession, we will in turn see a sharp slowdown in office and industrial rental growth in the wake of weakening demand for space. Plus we must remember that there is still some supply left in the pipeline and thus vacancies will begin to rise.”

But there is an upside down the line. At the first signs of a real recovery in the economy, the strong growth that this sector of the property market has experienced in the recent past will recommence, because its fundamentals are solid.

The news, however, looks bleaker for the industrial sector as it will be harder hit than the office sector. Firstly, because the industrial market was the first of the two sectors out of the starting blocks and is thus further on the curve, and, secondly, it is influenced by the worldwide consumer slowdown that has in turn impacted on manufacturing and retail warehousing.

As far as shopping centres are concerned, we expect this sector to follow a similar path to that of the housing market. Both are consumer dependent – and those consumers have been living beyond their means for a while now and corrections are taking place.

In addition, there is still a great deal of shopping-centre development in the pipeline. This sector has been the darling of property investors since the start of the decade, and this has now come to an end.

Back to top