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The property sector in South Africa was under pressure long before Covid-19 left the local economy reeling.
Leading up to the lockdown, the South African property sector was facing headwinds due to a lack of economic growth and a measure of political uncertainty. And to a degree, inefficiencies within certain municipalities also contributed to an already difficult environment – with town planning approvals potentially a struggle to secure, and rising utility costs and service delivery challenges.
We believe it may lead to a hybrid model, The use, design and layout of the traditional office will change because of what we experienced working virtually during the last few months.
National Head of Structured Property Finance at Investec SA
A fundamental shift in the landscape
Of course, not everyone suffered in the first days of the crisis. As people started shopping online more frequently – an uplift reflected in the worldwide share prices of online giants like Amazon – warehouse space suddenly become critical. The industrial properties that served the e-commerce space were well-poised to capitalise on the shift.
“One can’t generalise or paint everything with one brush,” Wiid points out.
“The reality is that each sector had its own consequences and felt the crisis in a different way. And many will still feel it in time because of the fundamental shift in the landscape, especially in the office space market.”Companies renting office space had leases in place that couldn’t be broken. ‘Work-from-home’ has become a prominent trend as technology has enabled people to work productively and collaborate effectively from home. Many companies now realise that they don’t need as much space. When current leases expire, businesses may reassess their needs and look at redefining the purpose of office space altogether.
Going forward, office space will likely be used less for focus work and more for collaboration, relationship building, strategy meetings and face-to-face time. “We believe it may lead to a hybrid model,” he says. “The use, design and layout of the traditional office will change because of what we experienced working virtually during the last few months.”
In fact, landlords may have to accept rental reversions. As demand decreases, they will be under pressure to accept lower rentals. However, only time will tell how much of a shift we will see.
Consolidation versus expansion
Before the pandemic, there was also a trend towards conversion of office space to suit a new purpose. Where allowed, office space was remodelled into hotel properties, student accommodation or general residences. And conversions will likely continue, he says, if these are in the right areas. However, between new buildings and conversions, the concern is for saturation in the market (as seen in certain nodes like Rosebank and Sandton).
Economic recovery is key
Much of the country’s recovery hinges on Government’s economic stimulus plan and whether its response package of more than R500 billion may alleviate some of the stagnation in the market.
In the meantime, lower interest rates and consequently lower instalments may make buying property more feasible – particularly in the residential market. “It really is a buyer’s market and an opportunity especially for those who are renting,” he says. “Renters are reassessing their position for two reasons. Firstly, the pressure on the market has brought prices down and, secondly, rates are positive right now – so your loan could be equal to or less than what you are paying in rent. For those previously unable to afford it, they may be able to get a foot in the property door and start building wealth.”
During lockdown people have also reassessed their property needs. Some are looking at the size of their properties and downscaling. Others, working remotely on a semi-permanent basis, may consider outlying areas for their primary residence, away from congested urban areas.
“The shift here is in mindset,” Wiid believes. “More people are relooking their priorities and making choices based on their lifestyles and not wholly on being close to work. They are also turning their attention to the design of their home as it may now need to include home office space.”
Technology a catalyst and accelerator
Although the ‘work-from-home’ model was already being adopted, the Covid-19 crisis not only accelerated adoption but, in fact, proved a successful case study for people not having to travel to and physically be present at the office. Remote working, as mentioned, will also lower the demand for office space.
While consumers did shop online before, the Coronavirus and lockdown exposed the immediate benefit and convenience of e-commerce. It has become a deeper part of people’s behaviour. Even suppliers – traditionally in service or hospitality industries – brought more of their services and offerings online and this will no doubt have an impact on the general retail sector.
“More people have started buying property through online auctions,” he adds. “While these were available before, people are now almost compelled to use these channels and it has proven to be very effective and successful. So, there will be fundamental changes in how people traditionally engaged from a sales perspective.”
The right time to reassess
“Businesses that are lowly geared will be in the best position to navigate the crisis as there are low demands on their resources,” Wiid points out. “Those that didn’t opt for fixed rates will also be benefiting from the reduced interest rate but it is, once again, about assessing their particular situation. It may be an opportune time to possibly take advantage of the current long-term rates. If there is a lesson here it is to avoid overextending yourself and having the right insurance in place for unexpected setbacks.”
However, facing a scenario where a business is unable to grow, the priority should be on managing cash flow and forecasts, managing debt, right-sizing lending and creating operational efficiencies. When a business is not generating revenue, one of the levers to pull is costs. If operations are as efficient as possible, the company has the leverage to grow when the economy recovers.
“The Covid-19 crisis has given us all the ability to step back, to reassess what we thought was the norm and to see how we can do things differently,” Wiid says. “This period has allowed businesses to test and challenge how they work. As an exercise, this will help them to align operations more effectively and even motivate them to take on strategies they may not have considered before. The upside is that when we come through the crisis and the economy turns, they will be able to run more cost effectively and leverage their income better.”
Wiid believes there will be opportunities across the sector for property entrepreneurs. The most obvious is buyers negotiating a better deal with willing sellers looking to create liquidity. Moreover, he believes opportunities could be presented in ‘alternative’ asset classes including affordable housing, retirement and student accommodation.
Re-invigorating the sector
A potential opportunity may lie in smaller retail centres or office blocks that form part of listed fund portfolios. These assets may have become non-core in their portfolios. Some may start re-evaluating their strategy and will look to sell these off and focus on core areas. “It may be the perfect time for clients to look at the non-core assets that the funds are disposing of, as the opportunity lies in more than just delivering a yield and income,” Wiid says. “In fact, focusing on these smaller office or retail centres may be an opportunity itself – to reinvigorate the space, bring in new energy and engage more meaningfully with tenants.”
However, Wiid believes that diversification is always a sound strategy to consider for South Africans looking to spread their risk. “If you look at how quickly the rand depreciated and how vulnerable we often are to our own economy and currency, then having hard currency and property investments offshore can create a buffer in times of volatility,” he points out. “In that respect, we offer our clients the same seamless experience internationally as in South Africa.”
Partnering in extraordinary times
While initially there was an uptake in payment relief, he mentions, this has slowed down and normalised in the last few months, especially as lockdown eased and tenants could start trading again (landlords are now typically receiving 80% to 100% of regular income). And, encouragingly, in the last few weeks, the Structured Property Finance team has seen an increase in activity and interest as it closes new deals.
However, some clients are taking a cautious approach, waiting to see an improvement in the market before making their next move. Wiid concedes that it is not always an easy landscape to navigate. “If you wait too long, you could lose out on opportunities, but at the same time you don’t want rush into a deal,” he says. “You must be ready to act when the time is right and, in that regard, it’s always good to keep a long-term view. On one hand, there could be opportunities in your path that you could strategically leverage. On the other, there will also be time to wait because there could be opportunities in the next while.”