With the SA economy expected to grow at less than 1%, this would be insufficient to curb an increase in the vacancy rate of commercial property and to prop up real property values at recent levels, according to John Loos, property sector strategist at FNB.
In his view, there will likely be a further increase in the average vacancy rate in South Africa's commercial property sector in 2020. This will in turn put pressure on rental growth and lead to "single digit total returns".
"We are waiting for the outcome of the tariff case between Nersa and Eskom, because the big issue for commercial property this year will be the combined impact of weak government finances and municipal rates and charges, as well as Eskom tariffs on commercial properties. These are the lion's share of (commercial) property operating costs," Loos told Fin24 on Tuesday.
"A few years ago, this was less of a problem as the economy was a bit stronger, but with vacancy rates rising, it puts downward pressure on rentals."
He expects the market would become increasingly concerned about future income streams, which will put downward pressure on property values as well.
FNB forecasts that the All Property Total Return will decline further from 9.8% in 2018 to an estimated 8.3% in 2019 and 7.5% in 2020. This is based on MSCI data which includes both capital growth and income return.
Loos cautions that the property sector faces significant risks due to the state of SA government's financial situation in general.
"The deterioration in the broader government finance, extending to parastatals and councils, is likely to translate into further above-inflation hikes in municipal rates and utilities tariffs, implying upward pressure on these two major areas of property operating costs," says Loos.
Since 2014, MSCI All Property Capital Growth - growth in property values excluding capital expenditure on the properties - data has shown negative capital growth in real (GDP inflation-adjusted) terms for five consecutive years from 2014 to 2018.
The average property value per square metre has also shown real (GDP inflation-adjusted) decline, recording consecutive negative growth years in 2017 and 2018.
Loos said one area where the overall vacancy rate was not going down, has been in industrial property, although he expects this rate will start to increase as well. This is due to the capacity utilisation in manufacturing sector output is declining.
Furthermore, Loos foresees that building activity will slow down and the rate of completions of building projects will drop.
"We saw strong industrial build completions and we think we will see that slowing too. It does not seem as if it will be a good year for the building industry," said Loos.
"But from a balancing of supply and demand of property point of view, the slowdown will ultimately help to stabilise vacancy rates."
* The 4th quarter 2019 results of the FNB Commercial Property Broker Survey, indicates high perceived percentages of financial pressure-related sales and movement in the owner-serviced property market. There is an accelerating growth in liquidations numbers, with the average year-on-year growth rate for total liquidations for the 12 months to November 2019 having been 27.2% compared with the 12 months from a year prior.
Ethekwini Metro appears to be an interesting "outlier", though. Its relatively low level estimate for financial pressure related movement and sales suggests that to date its economy may have held up slightly better than the rest of the regions through recent years of national growth stagnation.