Despite a marginal revision downwards, the world economy is still expected to deliver exceptionally strong growth at 5.9% for 2021, according to the IMF. This growth unfortunately remains uneven where it is expected that aggregate output for the advanced economy group would re-gain its pre-pandemic trend path in 2022 and exceed it by 0.9% in 2024. In contrast, aggregate output for the emerging market and developing economy group (excluding China) is expected to remain 5.5% below pre-pandemic forecast in 2024. The divergence in forecasts is as a consequence of uneven vaccine access and policy support.

Region 2019 2020 2021f 2022f 2023f
World 2.8% -3.1% 5.9% 4.9% 3.6%
Advanced economies 1.7% -4.5% 5.2% 4.5% 2.2%
Euro area 1.5% -6.3% 5.0% 4.3% 2.0%
South Africa 0.1% -6.4% 5.0% 2.2% 1.4%
Emerging and developing Europe 2.5% -2.0% 6.0% 3.6% 2.9%

Source: IMF World Economic Outlook October 2021

We continued to see signs of recovery in the SA retail sector with annualised trading density growing by 7.6% year on year to June 2021. This rebound is partly as a result of the lockdown restrictions in the prior period and early evidence of stabilisation in trade. On a monthly basis, trading densities are comparable to 2019 levels (nominal). This improvement in sales has resulted in retailer’s cost of occupancy (gross rental to sales) declining from the peak of 9.6% in February 2020 to 8.3%, however it remains 40bps higher than the pre-pandemic comparable.

Source: SAPOA retail trends report Q2 2021, Catalyst Fund Managers

Overall vacancy rates remain close to their peak at 6.8% as at June 2021 despite significant rental relief provided to assist tenants over the lockdown period. Smaller format retail outlets outperformed during the pandemic as consumers avoided the large malls and directed their spending power to their local neighbourhood and community centres. Over the past 9 months, community and neighbourhood shopping centres were the only category to see an improvement in occupancy rates with vacancies reducing to 6.9% and 6.6% respectively. In our opinion piece we look at retail vacancy rates for the listed property companies and highlight that some companies have been able to contain vacancy rates better over the pandemic period. This does indicate that there is still demand for quality retail space.

Source: SAPOA retail trends report Q2 2021, Catalyst Fund Managers

National office vacancies have been stubbornly high at over 10% for the last decade. Prior to the pandemic, the office market was characterized by an increase in new supply being met with weak demand. During this period the new supply was absorbed by existing occupiers consolidating their operations into new and more efficient buildings, like Discovery, Sasol, PwC, Deloitte, and Bowmans amongst others. The pandemic forced many occupiers to adopt a work from home (“WFH”) or hybrid system. This, coupled with the economic ramifications from the pandemic, has resulted in national office vacancies ballooning to 16% which represents the highest recorded vacancy since March 2003 (15%).

Source: SAPOA office vacancy report, Catalyst Fund Managers, 31 December 2021

Going forward, the supply situation appears to be much more favourable with only 68k sqm of office space currently under development. As a percentage of existing stock, this equates to c. 0.4% which is close to the all-time lows. Supply is likely to remain muted over the short to medium term given the amount of space readily available. We have also seen an increasing willingness to consider alternative uses for vacant office space with residential conversion being the most popular alternative proposed. This subdued development activity needs to be maintained over the medium term and, in addition, decent GDP growth will be required to allow for incremental demand to mop up the available space.

Source: SAPOA office vacancy report, Catalyst Fund Managers, 31 December 2021

The industrial subsector continues to benefit from structural changes due to the acceleration in e-commerce sales and the drive to improve supply chain efficiency. SA’s e-commerce market is still in its infancy, with online sales estimated to have increased to 2.8% in 2020 (World Wide Worx). Nominal rentals in the fourth quarter of 2021 grew by 3.7% year-on -year ending the year with nominal growth of 2% for 2021, according to Rode’s industrial survey data. This is an improvement on the 0.5% recorded for 2020, but still well below the 5% rental growth achieved in 2019. The industrial sector is not immune to the subdued macroeconomic environment; however, it has been less impacted compared to the office and retail property markets.

Source: Company data, Catalyst Fund Managers, * data as at June 2021, # data as at August 2021

Source: StatsSA, Catalyst Fund Managers, 2021: Year-to-date data as at 30 October 2021

The increased investment into e-commerce capabilities and the need to optimise supply chains has led to an increase in new logistic space demand, both locally and internationally. To cater for this demand, we have seen a noticeable supply response over the last few years with the amount of industrial space being built exceeding the long-term average. For 2021 year-to-date, we note that space completed is c.76% of the long-term average with the latest data point being as at the end October 2021. Despite the structural demand drivers in this sector, we believe rental growth is likely to remain subdued. This is due to a weak economic backdrop and availability of land which is placing a ceiling on market rental levels.

Source: StatsSA, Catalyst Fund Managers, 2021: Year-to-date data as at 30 October 2021

The severe economic fallout led to an unprecedented 300bps cut in the repo rate to 3.5%, which was the lowest since 1998. The outlook has changed with the SARB MPC raising rates by 25bps to 3.75% in November as it begins unwinding its accommodative monetary stance. The swap curve widened by 162 bps since the start of the year, with the 5-year rate now at 6.35%. While the swap curve has widened in the short term, the majority of the debt in the listed property sector is subject to fixed rates (75%+), and earnings should not be materially impacted by this in the short term.

Source: Bloomberg, Catalyst Fund Managers 31 December 2021

Over the pandemic period we saw the debt to asset ratios across the sector peak at c.40% as direct property valuations came under pressure. This was as a result of the discounts/deferrals provided, changes to risk parameters and weaker fundamentals. The ratio has been steadily trending downwards and is currently 37%. This remains above the long-term average of 32% however most companies remain well within average bank covenant levels of 50%. The lower debt to assets ratio is as a result of retained dividends, lower pay-out ratios, disposals and equity issuances including dividend reinvestment plans.

Source: Bloomberg, Catalyst Fund Managers, 31 December 2021