Retail Property Insights- Q4 GDP and retail property fundamentals

Posted On Tuesday, 05 March 2019 21:54 Published by
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We believe that the 0.8% economic growth rate for 2018 as a whole was likely “property negative”, sustaining negative real growth in property values and total returns in single digits.

 FNB_John_Loos

4TH Quarter GDP (Gross Domestic Product) figures were released by StatsSA today, and painted a picture of ongoing economic weakness. Quarter-on-quarter annualized GDP (seasonally-adjusted) growth was 1.4%, which was down on the 3rd quarter’s 2018 “high” of 2.6%. On a year-on-year basis, the move was also slower in the 4th quarter, from 1.3% in the 3rd quarter to 1.1%.

The 3rd quarter had represented a mild strengthening in positive economic growth, after the prior 2 weaker quarters, with that strengthening being helped by a resurgence in Agriculture production in that quarter, and possibly also helped by the lagged impact of early-2018 “Ramaphoria”, as the country’s leadership changed hands.

But the renewed 4th quarter slowdown reminds us that the myriad of structural constraints in the economy are still with us, and the Business and Consumer Confidence boost following Ramaphoria has passed on. And on an annual average basis, 2018 GDP growth of 0.8% was even slower than 2017’s already-pedestrian 1.4%.

Retail Property Economic Fundamentals

ln Looking into the sectors that are key to the strength of property, we find weak fundamentals relating to the Retail Property Sector. The “Retail and Wholesale Trade, Catering and Accommodation” Sector, of which a key component is Retail, saw its 4th quarter year-on-year rate also slowing, from a 1.1% “peak” in the 3rd quarter to a meagre 0.25%.

2018 as a whole actually turned out to be slightly stronger for this sector in 2018 compared to 2017, growing by +0.6% after the previous year’s -0.3% contraction.

However, the 4th quarter renewed growth slowing, as the 1st half 2018 consumer confidence spike wears thinner, does not point to any sustainable strengthening in this sector’s growth in the near term.

Weak year-on-year growth in the Trade catering and Accommodation Sector is explained largely by a weakening in real year-on-year Household Consumption expenditure growth through the year, from a peak 3.28% rate in the 1st quarter of last year to 1.11% by the final quarter of 2018.

This slowdown was driven by significant slowing in the highly cyclical growth rates of the Durable and Semi-Durable Goods Consumption categories since peaks reached late-2017 and early-2018.

And overall Household Consumption Expenditure growth, in real terms, recorded 1.8% for 2018 as a whole, which is slower than the 2.1% recorded in 2017.

Potential impact of economic performance on property

  • We believe it likely that 2018’s weakened economic growth, compared with 2017, was insufficient to arrest the recent rising trend in the All Property Vacancy Rate as reflected in MSCI half-yearly statistics. In the 1st half of 2018 MSCI results reported a rise in the All Property Vacancy Rate from 4.9% in the 2nd half of 2017 to 6.2% in the 1st half of last year.
  • Total Returns on Property for 2018 are expected to have slowed into single-digits, from a low double-digit 10.9% in 2017, with low single-digit capital growth persisting.

Retail Property Environment and Relative Performance

  • The Wholesale and Retail Trade, Catering and Accommodation Sector’s anaemic growth rate of 0.6% was even slower than overall economic growth, and although it was an acceleration on the negative rate of 2017, such growth is also believed to be insufficient to arrest the rising Retail Property vacancy rate trend from 2.8% in the 2nd half of 2016 to 4.1% by the 1st half of 2018 (MSCI half yearly stats).
  • The sector’s economic growth rate could also have kept the Retail Property Sector underperforming the Industrial Property Sector. Industrial Property has a stronger link to the fortunes of the Manufacturing Sector, and this economic sector grew by a mildly stronger 1% in 2018. In the 1st half of 2018, MSCI data showed Industrial Property to be the “top’ Performer” by a small margin.
  • The strongest economic growth sector in 2018 was the Finance, Real Estate and Business Service Sector, with a rate of 1.8%. This sector has a very strong link to demand for office space.

However, we would not see its GDP as the key driver of office space demand, but rather its employment growth rate would drive office space demand more. And much of this sector’s GDP growth rate was achieved by productivity improvements, while the average year-on-year growth in the sector’s employment was a far slower. The year-on-year growth in employment numbers in the Finance, Real Estate and Business Services Sector was only 0.6%, so the Office Sector’s economic fundamentals do not appear stronger than those of Retail or Industrial. The Office Sector has been more than able to accommodate a slight rise in employment numbers while seeing its vacancy rate increase the most of the 3 major property sectors(7.4% in H2 2016 to 12.2% by H1 2018).

We therefore believe that Industrial Property may have been the “outperformer” of the 3 major property sectors by a small margin over Retail Property in 2018, with Office Property the weakest sector.

In short, however, 2018 economic growth performance in all major economic sectors is believed to have been “property market negative” likely weakening all 3 major property sectors in 2018, relative to 2017 performance.

Last modified on Tuesday, 05 March 2019 22:02

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