While the predicted great depression never materialised, we have definitely lived through one of the great recessions of our time. Following this surprisingly widespread global slowdown, it will take some time to adjust. Property returns tend to lag the economic cycle, so expect nothing different this time around.
- The retail sector is largely dependent on consumers and their ability and willingness to spend. The large national retailers’ appetite for new space is also a major contributor to increased supply.
- The industrial sector, driven by the wholesale, logistics and production sectors, has tended to show a high correlation to the retail sector, especially during an economic recovery.
- Offices depend largely on business confidence, with employment trends in the “white collar” sectors influencing price paid per square metre and, importantly, the level of vacancies.
International and local trends have shown that retail tends to outperform the other segments during a sustained growth recovery, while offices tend to outperform in a more benign environment. In the US, the recovery in retail property returns typically lags a recovery in GDP growth by between six and 24 months.
In line with this research, investment in quality retail property is favoured over the medium term, followed by industrial and then offices.
Retail growth will remain under pressure through the first half of 2010, given a cautious consumer and an oversupply of retail space. There will be a shift towards the dominant (or defensive) centres and away from smaller peripheral centres.
A smaller spending pool among consumers, combined with an increase in the supply of space, will lead to a decline in the non-defensive (smaller, less well-located or peripheral) malls, as tenants look to focus their exposure in high-performing centres.
This will lead to higher vacancies, negative rentals and an inferior shopping experience that will result in fewer shoppers in the peripheral centres.
Industrial property returns have traditionally shown a high correlation to retail returns (particularly in an economic upswing). Those with existing space will see increased demand as we move through the second half of 2010.
In the previous property cycle, office returns were severely affected by excess supply. Fortunately, available space was at record lows going into this recession and, while high vacancies will have a negative impact, vacancies should not fall as low as the 20% seen in 2001 and 2002.
Office-demand growth is largely driven by employment trends in the services and financial sectors of the economy. Even though these sectors have not experienced the same level of layoffs as in the mining and manufacturing sectors, a potential rise in unemployment remains a concern.
In the SA property market, expect rentals to remain under pressure and vacancies to continue rising through the first half of the year, stabilising towards the third quarter before we see a strengthening of fundamentals in 2011.