Commercial tenant payments set to deteriorate
THE PERFORMANCE of commercial property tenants could deteriorate further before improving, according to credit bureau Tenant Profile Network (TPN).
Although the economy should improve mildly in the near term, there could still be a lagged negative impact on the performance of commercial tenants, because of five years of broad economic stagnation, TPN said in its latest quarterly commercial sector rental monitor.
However, the report said that there were not many signs yet of any deterioration in the payment performance of commercial property tenants.
It said the percentage of commercial tenants “in good standing” with their landlords was at 82.27 percent in the first quarter of this year, which was slightly below the 83.11 percent in the previous quarter and the seven-year high of 83.56 percent achieved in the third quarter of 2012.
But TPN said this percentage remained strong compared to the post 2008/9 recession level of 66 percent in late 2010.
Tenants in good standing comprises tenants who paid in full on time, tenants who paid late and tenants who paid during the grace period.
TPN added that the 6.03 percent of commercial tenants who did not pay in the first quarter was marginally higher than its multi year best level of 5.39 percent in 2014. During the post 2008/9 recession, the percentage of tenants who did not pay peaked at 16 percent.
TPN said the key to the mild deterioration in the payment performance of commercial tenants to date was probably the very slow pace of economic deterioration from 2012 to last year, which was probably best described as a “slow puncture”.
The “snail’s pace” of interest rate hiking by the SA Reserve Bank by only 2 percentage points over slightly more than two years from early 2014 to early last year was also key to the slow pace of cyclical weakening.
“The commercial sector has, in many instances therefore, had time to adjust and absorb mounting financial pressure. But not everyone can do this indefinitely and we think it is likely that mild near term tenant performance deterioration could follow before it gets better,” it said. The performance of commercial tenants has deteriorated despite a slowdown in asking rental growth.
The latest SA Property Owners’ Association (Sapoa) office vacancy survey said the office sector recovery was becoming increasingly fragile.
“While the aggregate vacancy rate is still moving broadly sideways, signs of weakness are becoming apparent, especially the recent slowing in asking rental growth which was negative in inflation adjusted terms at (first) quarter end,” it said.
Sapoa added that any future improvement in vacancy rate and asking rental growth would depend on a strengthening of underlying demand drivers, particularly financial and business services employment and capital investment.
The national office vacancy rate increased by 0.4 percent to 11.1 percent in the first quarter.
Sapoa said asking rental growth had slowed significantly on a year-on-year basis, which was indicative of the current low growth environment coupled with excess supply in the market.
“A significant factor driving the excess demand currently prevalent in the market is the amount of space ‘left behind’ by large corporates consolidating their real estate operations.
“This backfill risk has already contributed to increased vacancy rates in certain nodes with the potential for more as several large development projects come on line in the short term,” Sapoa said.