27 Aug 2020

Reassessing SA’s property sector

Business Class

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Charl Wiid, National Head of Structured Property Finance at Investec SA, looks at the uncertainty, changes and opportunities in the local property market.
 

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.

Charl Wiid
National Head of Structured Property Finance at Investec SA

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.

A fundamental shift in the landscape

When the Coronavirus struck, the effect on property stakeholders often manifested in a liquidity crisis. In retail, for example, shops and businesses couldn’t open and trade during the first levels of lockdown. The immediate pressure was how to pay rent without generating any revenue or income. Landlords and tenants had to navigate some tough rental concession negotiations.
 

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

Leading up to the Covid-19 crisis, SA had seen many new buildings constructed in certain areas and a great deal of consolidation had already taken place, especially in the office market. For example, smaller regional and satellite offices were consolidated into a central head office. “The move left many offices vacant,” he says. “When you have both consolidation and new buildings, it will put pressure on the market as supply exceeds demand.”
 

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

“One of the biggest challenges facing the sector, and the country, is economic growth,” Wiid stresses, “especially as growth has been declining for a period of time even before the pandemic hit.”
 

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.”

R500 billion
The country’s recovery hinges on Government’s economic stimulus plan and whether its response package may alleviate some of the stagnation in the market.

Technology a catalyst and accelerator

There is no doubt that technology has also had a broad impact on the market and a significant influence on lifestyles, working environments and general consumer behaviour.
 

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.”

empty office

The right time to reassess

For business owners with properties, the key thing to consider right now is cash flow. Some are considering downsizing or selling off property, but it may be too soon to assess the impact  as so much depends on the economy opening further in the coming months. A prudent approach is called for because growth can, and will most likely, come at some point.
 

“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

“Smaller retail centres in certain neighbourhoods and suburbs are also well positioned to retain their value and to trade well in the future, especially those with a lower reliance on line shops in comparison to anchor tenants,” he points out. “However, in the current environment the possibility exists that smaller, independent or family-owned shops are likely to struggle compared to larger retailers for a while.” 
 

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.”

Global snapshot

In terms of property investments in the UK, Wiid says there has been a cautious approach  over the last few months. Global markets are experiencing similar volatility and slowdown. The pandemic has been a bump in the road for the UK market and, like here in SA, some sectors have thrived while others are struggling to hold their heads above water.
 

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

“In our team, we have stayed close to our clients during this period and continue to do so as we move closer to level one,” Wiid goes on to say. “We partner with our clients and assist them to get through this challenging period.”
 

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.”

80% - 100%
Regular income typically received by landlords

Conclusion

“The reality is that we will get through this, especially with hope for a new vaccine on the horizon, infections coming down every day and other sectors opening as lockdown eases,” Wiid concludes. “We’ll start to see more activity and as a property investor or entrepreneur, you need to be ready to take advantage of that.”

For more on property funding and finance solutions, visit Investec Structured Property Finance.

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