When it comes to a region’s, or market’s ability to handle a major economic shock, the financial and structural health of that market is important.
Looking at the major property sectors’ “health”, and the health of the region’s tenant population, suggests that of the Big 3 provinces in South Africa (in terms of economic and property market size), the Western Cape approached the COVID-19 Crisis in the best possible shape.
Big 3 Provinces’ Property Tenant Health.
• TPN “Tenants in Good Standing” Stats
By late-2019, all 3 major provinces had seen the rental payment performance of their Commercial Property tenant population slide mildly from highs reached a few years prior. This is a function of a gradual economic growth stagnation in most major regions of the country.
But the Western Cape has consistently maintained the highest percentage of commercial property tenants “in good standing” with their landlords regarding their rental payments over the past decade, through the post-2009 Global Financial Crisis period (according to TPN data).
By the 3rd quarter of 2019, the Western Cape’s percentage of tenants “in good standing” was 86.62%, compared to 80.75% in KZN and 80.08% in Gauteng.
On the Residential Rental Tenant side of the market, the Western Cape has also showed a consistently higher percentage of tenants “in good standing” with their landlords over the past decade.
Once again, though, recent years have seen a gradual deterioration in the “good standing” percentages in all major 3 provinces, but what is striking is that the pace of deterioration in KZN and Gauteng had been faster than in the Western Cape, the performance gap between itself and the other 2 thus widening.
By the 1st quarter of 2020, preliminary 1st quarter TPN data showed the Western Cape’s percentage of tenants in good standing at 85.12%, while those of KZN and Gauteng were a noticeably lower 77.03% and 77.0% respectively.
• MSCI tenant data shows a different split but a similar relative outcome in recent years
Examining MSCI annual data, we see a similar relative tenant-related picture in data for bad debt write-offs by major property sector per major province.
We use a 2-year moving average for smoothing purposes, and find that the Western Cape has had the lowest Retail Property bad debt write-off as a percentage of gross income receivable, to the tune of 0.16% for the 2018/19 period, while KZN had a higher 0.28% and Gauteng the highest 0.44%.
The Western Cape’s Retail Property Sector has had the lowest bad debt write-off percentage for over a decade.
With regard to Office Space bad debt write-offs, Western Cape once again recorded the lowest percentage, i.e. 0.09% over the 2018/19 period, while Gauteng recorded 0.23% and KZN 0.25%.
With regard to Industrial Property, the Western Cape also had the lowest bad debt write-off as a percentage of gross income receivable, to the tune of 0.13% for 2018/19, while KZN recorded 0.27% and Gauteng 0.65%
The Western Cape thus found itself recording the lowest bad-debt write-offs in all 3 major property sectors over the past 2 years, while Gauteng finds itself with the highest debt write-off percentage in 2 out of the 3 major sectors.
Big 3 Provinces’ Key Commercial Property Sector Vacancy Rates.
Tenant performances aside, another indicator we regard as key in ascertaining a market’s ability to “hold up” when recession arrives is the average vacancy rate of the region.
In this regard, the Western Cape once again fares well in 2 out of the 3 major property Sectors.
In 2019, the Western Cape had the lowest average Retail Property Vacancy Rate, according to MSCI data, to the tune of 2.5%. KZN recorded a higher 3.9% while Gauteng had the highest rate of 5.5%. All 3 provinces’ vacancy rates had been on the rise though.
The relative picture was the same with regard to Office Space, the Western Cape having the lowest average vacancy rate of 5.3% in 2019, KZN with a significantly higher 12.78% and Gauteng with a 14.7% rate.
The one area where the Western Cape no longer had the best performing number was in the area of Industrial Property, where its average vacancy rate rose considerably in 2019 to register 5.5%, similar to Gauteng’s 5.3%, while KZN had a noticeably lower rate of 3.44%
Conclusion
In short, of the 3 major provinces, indications are that the Western Cape’s tenant population, both on the Residential and in the 3 major sectors of the Commercial Property Sector, has been outperforming those of Gauteng and KZN over a considerable period of time in the run up to 2020.
This points to a greater level of average financial strength amongst both the business and residential population in that province. That relative financial strength could enable the province’s property market to come through the severe COVID-19 recession unfolding in 2020.
Added to this, in 2 out of the 3 major property sectors (Office and Retail) it had the lowest average vacancy rate as it approached 2020. These “less oversupplied” markets, too, should assist that part the Western Cape’s property market at least to hold up its rental and property values better.
But this is not to say that the Western Cape won’t experience severe property market pressure. It will indeed, because the current recession is severe. But it may come out of the recession in better shape than the other 2 major provinces.
Gauteng, on the other hand, looks to be the most vulnerable property market of the 3 major regions, having the highest property-related bad debt write-offs in 2 of 3 major property sectors, i.e. Retail and Industrial, while having relatively high vacancy rates in all 3 sectors, with its Office and Retail vacancy rates being the highest of the 3 provinces.