2022 Outlook – “Normalised Correction”
While actual values are expected to stop their decline in 2022, the ongoing gradual correction is expected to continue throughout the FNB 3-year forecast horizon in “real” terms.
Firstly, what leads to the belief that, in the short term, actual value decline will come to an end? Its all about the expected path of the economy. After a severe real GDP (Gross Domestic Product) contraction to the tune of -6.4% in 2020, a subsequent recovery in growth in 2021 and beyond improves demand for commercial property as a whole, just reducing oversupplies somewhat, which I expect to end value decline in 2022.” However, the economic growth recovery expected doesn’t appear sufficient to bring about real inflation-adjusted value growth. This expectation is based on FNB’s GDP forecast that, although recovering, is only expected to reach a 2019 level (not growth, actual level of economy-wide output) in 2022. Given that 2019 was a year in which the rising All Property vacancy rate trend continued to rise, I don’t see the rising vacancy rate, almost in double digits recently, being turned downward just yet, and would thus expect market rentals and real operating incomes on property to remain under pressure. I would therefore expect the correction to continue more gradually in 2022, with real value correction continuing but no longer all out nominal decline This is what is meant when by the expected “normalisation of the correction” in 2022, with gradual real value decline being less of a concern to mortgage lenders than all out decline in the actual value of the security behind the loan. FNB forecasts real GDP growth to slow back to its pre-COVID-19 pedestrian rates following the 2021 post-lockdown surge. After an expected 4.7% growth in 2021, the result of an extremely low lockdown base created in the deep recession of 2020, 2022 is expected to see growth taper once more to 2.2%, and then further slowing to below 2% in the years thereafter. The reasoning behind the slow projected growth after the initial post-lockdown spike is South Africa’s well-documented myriad of structural constraints, severe capacity limits in the broader public sector and its parastatals, ageing infrastructure and ongoing capital expenditure weakness in that sector, being but 2 broad weaknesses to mention. The recent erratic electricity supply, and another severe hike in electricity tariffs being requested, is but one visible critical constraint on growth in the economy. And now, as the SARB starts its interest rate hiking cycle, interest rates become a further mild dampener on demand in what is a highly credit-dependent market. This long term stagnant growth in turn is behind the reasoning for ongoing valuations correction in real terms. We expect the SARB to “go easy” on us with interest rate hiking, mindful of how fragile the economy is. FNB thus only expects two 25 basis point interest rate hikes in 2022 following\ last week’s 1st hike in the current cycle.
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