07/07/2020
From the Valuers desk:
I have received many concerns regarding valuations during the COVID-19 pandemic and associated lockdown period, predominantly from corporate clients who have concerns regarding financial investments and loan exposure. Unfortunately, there are no easy answers to these.
Once the Coronavirus (COVID-19) reached pandemic status, a National State of Disaster was declared in South Africa. Substantial turmoil has occurred in local and international financial markets, and due to the developing situation, it is not possible, currently, to quantify its long-term or short-term effects on real estate markets or on any specific property. Although at face value, if one considers a property in isolation the temptation exists to conclude that there is no change to tenants and there may be no physical changes to the property, but there has been a major change to the global property environment. Even in a town with 1000 business / industrial properties, if 50 properties have increased vacancies or decreased their rental rates in order to boost occupancy of their properties (and ensure cash flow, albeit at a lower rate), this will have a knock-on effect on the market as a whole. At this juncture, we do have informed insights from past global financial crises.
In a recent webinar held by the South African Institute of Valuers - led by Malusi Mthuli (Head of Valuations FNB – Commercial Property Finance) and Tracy Myers (Senior Valuer at Standard Bank) - there was extensive discussion around what can be expected with regard to the impact of the COVID-19 pandemic on the property market in South Africa. Some attendees argued that the future of the property market should not be pre-empted and that valuers should wait for empirical evidence to emerge, i.e. proof of income drop, proof of an increase in vacancies, and proof of distressed sales and market value decreases. The remainder of valuers maintained that we, as Professional Valuers, have the experience to foresee changes in the market as this is not a localised pandemic, but a global one.
During this webinar the following points were agreed upon as the “reasonable”, anticipated changes that could be expected:
1) A 10% reduction in market gross rental rate / m².
2) An increase of ±2% in vacancy provisions.
3) The average market rental escalation will decrease by ±2%.
4) Annual estimated operating expenses will increase by ±1% above normal.
5) An increase of 1% on average capitalisation rates.
By applying these factors to a valuation completed pre-Covid as an example, this revealed a 21% decrease in market value!
Further factors shared during the webinar were that only 65% of actual accounts billed by landlords, such as Broll and Attacq, could be collected. About 35% of tenants are unable to meet their rental obligations, only 37% of tenants could pay rent in full, 27% of tenants have applied for subsidies, 31% of tenants are dipping into savings to meet commitments, and a further 22% are receiving loans to make rental payments. As these loans, savings and subsidies are not sustainable; the full impact will only be seen in the next 12 months. Furthermore, at the time of Level 5 lockdown, 32% of tenants indicated they were likely to move out once lockdown regulations allowed.
To adjust the values now, without empirical evidence, would be impossible to defend or quantify, however, I have no doubt that there will be a varying market value decrease in the foreseeable future to most sectors of the property market, specifically retail, office, hotel, conference centres, as well as to a lesser degree, commercial and industrial properties. The good news is that, with many smaller business owners able to work from home and some corporates able to work remotely, the housing market is likely to remain stable as everyone still needs somewhere to live (and now to have a home-based office). The knock-on effect of this is, again, going to be seen in the office sector. The housing market will see pressure on affordability and some increased vacancies.
The impact of the lockdown is not yet reflected in the data. There is increased pressure on companies with regards to cash flow, staff, and suppliers, and these factors playing out dynamically over the next 18 months will certainly change the property landscape. We cannot at this stage alter market valuations based on insights and will have to wait on market evidence. We have less certainty and a higher degree of caution as things stand and suggest property market values be reviewed in shorter intervals than that which has been the norm, owing to uncertainty in an unfolding situation.
We are in for a bumpy ride.
By Nina Peycke : NDip (Real Estate), Professional Associated Valuer, Member of SAIV, Sworn Appraiser for the Master of the High Court
