When Jim Morrison said “Break on through – to the other side” he could quite easily have been singing about Covid-19 and the property industry in 2020. It is impossible to make accurate predictions about the direction of real estate in the present environment. Add to this the segmentation of the industry – retail, industrial, residential, commercial/office plus the various category divisions within those segments plus the geographical and micro location of the asset and one can easily see that sweeping comments are inappropriate.
The challenges in SA’s property industry were already well entrenched before Covid-19 with most of the REIT sector having suffered substantial share price declines as they submitted to negative sentiment on the sector due to poor economic growth prospects and uncertainty caused by the present political dispensation embracing “Land expropriation without compensation”.
With the outbreak of Covid-19, Neu Capital Africa published a chart categorizing industries that will either be broken, survive or thrive, post Covid-19. The sector analysis presented there is a discussion document and properties themed around serving those sectors will perform in line with our groupings.
If we were however to use traditional property classifications, then the following are our views on the likely outcomes.
Most existing office nodes in SA are significantly under occupied already. The trend will increasingly be to work from home and use space less densely. Tight desk configurations will be under scrutiny and, whilst we do not see the return of large offices, there certainly will be a large change in the use and configuration of offices, pause areas and canteens.
Professionals practicing in the occupier services or corporate real estate service arena (practices who plan and design the fit out, configuration and administration of corporate offices) will find opportunities from changing requirements of existing occupiers and their service will invaluable in this environment. Particularly those who are able to leverage off international best practice.
Will not simply disappear. We have already in recent years seen the transition from high street, to shopping malls to big box value centers and finally to online shopping. Most retail centers will continue to struggle, and new developments will have the added challenge of nursing incoming tenants through the J-curve of a new business venture with increasing landlord costs on fit out and rental concessions. National tenants have already flexed their muscle with landlords, and it is impossible to expect line shops now to carry any shortfall in revenue burden. In fact, viable, destination type line shops will be highly sought after and will be in a strong negotiating position in any landlords’ tenant-retention strategy.
A fundamental constraint in retail will be the significantly reduced purchasing power of the customer. We are however seeing many innovative payment solutions coming to market who are using alternative credit scoring based on machine learning and AI. We definitely expect see a tenant’s market for the foreseeable future with those retailers who are able to be agile in their customer payment solution offering being the winners.
Lockdown has been very disruptive to supply chains. The has been a short-term spike in storage demands and we can expect an increased focus on integrating technology into supply chain solutions. Premises with proper circulation space, good 12m minimum floor-slab to ceiling clearance, reliable energy supply, and other state of the art technological benefits will remain in demand. The large exposure to single tenant balance sheet will remain a key element in the funding and risk assessment of these assets.
Older style industrial premises have generally proved inefficient to repurpose or reconfigure and are expensive to operate and unless supported by strong tenant financials, they will have difficulty obtaining support.
The “resi” market is very interesting and its various segments will perform differently. The sheer overwhelming demand for affordable accommodation as well as the need to downscale existing accommodation may cause a level of resilience in this sector. Well managed rental accommodation will remain attractive. Financiers traditionally liked the granular exposure element of resi instead of large single tenant exposure and were trending towards a growing appetite for funding these assets. The winners here will be those landlords who can demonstrate a disciplined tenant retention strategy and professional approach to managing large tenant volumes with a dynamic and empathetic tenant retention model.
Student accommodation will be completely dependent on how universities respond in providing online learning solutions. The need to continually be on or near campus has now reduced.
Estate living and retirement facilities will remain popular and their success will remain a function of their micro location and facility offerings.
Sub R3m market (and even R5m) will offer opportunities but will display considerable volatility with a trend toward renting because of an existing surplus of stock. More affordable rentals will be available as a cheaper option to mortgage because uncertainty continues to weigh on the sector due to the governments expropriation policy. This sector is largely driven by bank lending appetites and even with the lower interest rates now on offer, it can be expected that decision making will be cautious and slow as banks scrutinize their existing loan books and impairments.
Most travelers will want to avoid large groups of people. The hospitality industry will be negatively affected by Covid-19. However, within this segment, the more resilient offerings will include quality experiential venues that facilitate social distancing in an unobtrusive manner, offer high-end hygiene, and can provide access to appropriate health services. This suggests that appropriate African lodge experiences may be more attractive in the hospitality sector.
SUB SAHARAN AFRICA
Markets in Sub Saharan Africa are a lot more complex and once again a proper evaluation requires careful analysis of each individual country and sector.
The much-vaunted growth in Africa needs to be carefully measured against the size of those economies. For example – on a simple GDP measure Kenya has an economy less than one third of the size of SA. Ghana is less than one fifth. On a GDP per capita basis, the numbers are only exacerbated. Even Nigeria’s large GDP is considerably diluted on a per capita basis by a population three times the size South Africa’s.
Three key challenges in any investment in Africa are:
1. Liquidity: Larger institutions are finding that they cannot exit their developments easily and, in the case of property, this may mean holding on for longer than 5 years and dealing with the first round of heavy maintenance costs and lease renewals.
2. Corruption: An ongoing challenge.
3. Infrastructure: In property this results in high utility costs due to diesel generators, tanked water and additional costs to simply give proper road and bridge access.
Specific to real estate, we can add the following
1. The lack of big box tenants in retail. Add to this the real issue that most SA retailers have struggled to deliver sustained growth in SSA and are now facing portfolio challenges back in SA.
2. Low GDP per capita translating into very low retail spend per head. Footfall needs to virtually double what is required for viability in SA.
3. Institutional landlords generally obtain US$ mortgage funding which they translate into US$ rental charges. Most retail sales are in local currency resulting in a mismatch.
4. Very high cost structure because of insistence on using expats where local skills are now more than adequate.
5. Project management is also extremely difficult with costs overruns and opening dates invariably being extended. Center openings tend to be phased and smart tenants include penalty clauses on the landlord because of overheads and stockholding costs caused by the inevitable delay.
6. Very under-developed mortgage markets do not aid the residential sector.
Property investment into SSA makes sense only if it is to diversify an existing large mandated property exposure within Africa. If a few of the larger countries were grouped, then their collective GDPs start to match the size of South Africa’s. Managing these assets from a distance remains challenging and we believe these markets may be vexed for some time to come.
Proper objective advice is required from experts on any property undertaking. Bespoke premises that are Lease driven by a solid tenant/s and that are done at sound economic terms delivering a respectable risk adjusted return will remain the maxim for sound investment. The big challenge is determining the risk adjusted return in the post Covid-19 markets. Decisions must be based on sound economics – investors cannot simply sit on the sidelines holding out for the bottom of the market because it is notoriously difficult to time call correctly.
This is the third article in a series which Neu Capital Africa has published on the impact of Covid-19 on the African private capital-raising markets. The others can be found on Neu Capital Africa’s blog page.
Mazars corporate finance division and Neu Capital Africa – now rebranded as Cala Capital Africa – have announced the consolidation of their capital raising advisory capabilities to establish Africa’s leading mid-market capital raising practice. The partnership will see Mazars corporate finance division combine its technical skills and extensive footprint – which includes capabilities to service […]