20 MAY 2020
Sentiment towards global real estate has fallen emphatically among both investors and occupiers following the spread of COVID-19, according to the Q1 2020 RICS Global Commercial Property Monitor.
Globally, confidence among occupiers has deteriorated in the last three months in 33 of the 34 countries surveyed, with the same proportion also now showing negative readings. RICS’ Occupier Sentiment Index (OSI), a gauge of sentiment amongst occupiers, has fallen to -48 in South Africa with the global pandemic outbreak and subsequent economic shock pausing any potential for a market recovering in the short term.
With tenant demand reportedly falling across each sector (office, retail and industrial) Nigeria also saw a decline in occupier confidence with the OSI falling from +11 in Q4 to -7 this quarter. This is a sharp turnaround from the positive trends that were cited at the end of 2019.
The same trend is evident among investors too. Confidence has fallen in all countries. RICS’ Investor Sentiment Index (ISI), reflecting sentiment among investors, is now in negative territory in majority of countries surveyed. Investor confidence has declined in African countries as well with South Africa’s ISI falling to -42 this quarter, and Nigeria’s to -15, compared to +15 of the previous quarter. This is mostly due to investor enquiries in Nigeria almost stagnant at the headline level, with a growth in the retail sector being offset by a decline in investor demand for industrial properties.
Both investors and occupiers fear that we are not yet over the worst when it comes to the impact on the real estate sector. The forward-looking metrics show an even more pronounced shift. Looking at the expectations for the next twelve months, in the case of both capital and rental values, respondents expect both to see a sharp decline in South Africa. While, in what appears to be a global trend, industrial properties appear more resilient than office and retail property in the country.
Expectations in Nigeria remain positive on rental growth projections with rents envisaged to rise by 2% over the next year across all prime markets. However, expectations in Lagos are more subdued than they are nationally.
While retail is the most depressed across the world, following the impact of global lockdowns, the deterioration in sentiment has been most marked for offices. Anecdotal evidence from survey respondents bear out the sector patterns with some highlighting the scope for agile working to become more commonplace in the aftermath of the virus, lowering the demand for office space. The acceleration in the structural trend towards e-commerce is also noted, with increasing interest in prime logistics space viewed as a likely outcome.
Simon Rubinsohn, RICS Chief Economist, commented: “The impact of COVID-19 on sentiment in the commercial property sector was always going to make for painful reading. However, the erosion in confidence is stark. What’s even more worrying for investors and occupiers alike is that the full extent of the toll it will take on businesses and the underlying economy is still unclear. Given these conditions, respondents are clear that there will be no quick rebound.
Although hard to generalise, this hostile environment makes government support more vital to underpin a global recovery as lockdowns begin to ease. There is also a strong case for a more collaborative approach between landlords and tenants to manage the challenges presented by the current set of circumstances.
What started as a public health crisis morphed into an economic one, and we will see further structural, long-term change as a result of this pandemic. We have already seen the impact on retail as consumer behaviour changed by necessity, and remote working affecting how office spaces are viewed. The ongoing rise of e-commerce and a shift in supply chains towards ‘Just in Case’ is likely to trigger a further change in the investment dynamic.”