Commercial Property Market Outlook – Accelerated Negative Capital Growth in 2020

Since 2014, the Commercial Property Market has been gradually weakening, with broadly declining total returns that have more than halved, from 15.7% in 2013 to 7.6% by 2019,  according to MSCI Digest data  released in April, completing the property picture for 2019.

The key contributor to these declining All Property Total Returns has been slowing capital growth, from a decade high of 6.9% in 2013 to a negative -0.2% by 2019.

The expectation of a deep recession in 2020, along with big recent corrections in both the Listed Property Sector and the Bond Market, lead to the expectation of significantly greater magnitude of negative capital growth in 2020, and continuing through into 2021 given the slow nature of property value corrections.

Therefore, from the MSCI data estimate of -0.2% negative All Property Capital Growth for 2019, our 2020 projection is for a bigger -5% decline. Further decline in 2021 is possible in lagged response to the deep economic recession of this year. In addition to this years GDP contraction, actual 2021 GDP level is forecast to remain significantly below that of pre-COVID 2019 levels, with a forecast +0.5% positive growth rate next year insufficient to yet claw back the             -4.5% projected to be lost this year.

This year’s negative capital growth rate forecasts would exceed the previous multi-decade low of-3.4% recorded during the 1998 “interest rate shock year”.

Economy-wise, much depends on how the COVID-19 virus spreads both locally and domestically, and when medicines that can aid recovery from it, or vaccines, emerge. The economic environment is thus arguably in territory more uncertain than in many decades, highly-dependent on a virus.

The average All Property Vacancy Rate of MSCI has been rising since the multi-year low of 5.2% reached in 2014, to reach 6.7% by 2019. 2014 was the year where GDP growth dropped to below 2% (recording 1.8%) for the 1st time since the 2009 contraction, and a further slowing to 1.2% in 2015 appeared to be the catalyst for the start of a rising vacancy rate trend.

Ito would thus appear that GDP growth battling to reach 1% in recent years has already been insufficient to create the level of property demand required to turn the All Property Vacancy Rate downwards. A -4.5% forecast GDP contraction could thus be expected to speed up the rate of increase in the vacancy rate significantly. This would likely place downward pressure on rental growth, which we would in turn expect to slow nearer to zero than its 2019 +4.1% positive growth rate.

Cap rates in all of the major categories of property had begun to rise mildly in recent times. We would expect to see more of the rising trend, but possibly at a faster rate, given that the vacancy rate increase is likely to speed up, and given the recent sharp weakening in both the bond and listed property markets recently.

All Property Total Return (based on MSCI historic data including both capital growth and income return) is thus forecast to decline further, from 7.6% in 2019 to 2.6% for 2020. This would be lower than the previous 2-decade low of 5.5% recorded in 1998, but we believe that such an expectation is justified given the apparent severity of the unfolding recession this year.