Impact of higher fuel prices on commercial property

Impact of higher fuel prices on commercial property

It is well-known that cumulative fuel price increases have significantly added to overall consumer price inflation, and the latest increases further sustain this pressure.

For many consumers, fuel spend is difficult to avoid, meaning they have to reprioritise other expenditures and possibly reduce spending on non-essential items. Many will also have to delay spending on low-frequency purchases, such as clothing, furniture or motor vehicles.

The knock-on effects of lower consumer spending will no doubt be felt in the overall economy, including the property market.

Retail

John Loos, a Property Sector Strategist at FNB Commercial Property Finance, says: "We believe this impact could be more noticeable in larger super-regional and regional shopping centres. These are more significantly focused on purchases like entertainment, eating out, clothing and footwear retail.

"Smaller convenience and neighbourhood centres focused more on essential food, and grocery shopping is likely to feel this indirect impact of fuel inflation to a lesser degree."

Hotels

Loos says that another commercial property sub-sector that higher costs of fuel will challenge will be hotels.

"Already challenged by revenues and occupancy rates which are still well-down on pre-lockdown days, high petrol and diesel prices are a negative for holiday and business travel. This means the demand for overnight accommodation will be lower as a result, which will put additional pressure on leisure properties."

Offices

Loos believes that ongoing fuel price increases are a guaranteed negative for an office property market that is already-battling.

"The office market is challenged by a lot of underutilised space as a result of more people working from home than before the Covid-19 lockdowns. Now, as fuel prices rise to new heights, we expect many commuters who can work from home to do so to an even greater extent to keep fuel bills down," he says.

"This can be an added encouragement to certain employers to reduce their office space - if the success of the lockdown work from home period wasn't already enough encouragement. So, the higher fuel price is an additional potential source of pressure on the office market."

He points out that commercial property is sensitive to interest rate changes.

"Fuel prices have been driving overall inflation higher, with resulting higher interest rates. This means they indirectly influence credit-driven property buying through their impact on interest rates.

"We expect sales activity in the commercial property market will start to slow down in the second half of 2022, following a recent period of strengthening. The ongoing interest rate hiking will be a key driver of this expected slowdown," says Loos.

However, not all property professionals agree that higher fuel prices will cause a notable slowdown in the office market.

"There's no doubt that these are tough times, but South African business people are remarkably resilient," says Rob Kane, chief executive of Boxwood Property Fund and non-executive chair of the Cape Town Central City Improvement District (CCID). The CCID a private-public NPO mandated by stakeholders to manage and promote the Cape Town CBD in partnership with the City of Cape Town and the SA Police Service (SAPS).

Kane says well-managed office properties with good security, easy access and flexible office space still have high occupancy levels at good rental rates.

"The key is to maintain buildings to high standards and offer the sort of facilities that tenants are looking for. These include parking and top security. Buildings that meet these standards should have no difficulty attracting desirable long-term tenants," says Kane.

Concerning the work from home trend, he says many company executives have found that working in isolation is less productive than collaborating with colleagues in the workplace.

"To be really productive, people need other people in the workplace. In particular, young people need the experience of working in groups with colleagues of all ages to learn the ropes in any line of work. Many companies have already moved back to office-based business models, and we don't expect the higher fuel price to significantly hamper this."

The commercial property market niche doesn't operate in isolation; the full impact due to higher fuel prices can only be fully determined over time.

Writer : Sarah-Jane Meyer