Commercial property has had a bit of a rough ride of late between rumours and misunderstanding of the proposed redistribution of land without compensation, the strain on the economy which always hits the property market hard and extreme caution of international investors, affecting new and existing firms to establish a footprint in South Africa.
The South African property market has been experiencing a lag over the last year and a bit, with the evidence of it showing in the drop of growth and share prices of property funds, who own the majority of commercial properties in the country. Being at the coalface of property transactions, what has your experience been?
There has been a notable decline in transactional activity in terms of the acquisitions of certain types of investment properties. Property funds have also been disposing of non-core assets that are no longer performing due to high operational costs, tenant attrition and downward pressure on rental income. We are finding this particularly across the retail and office sectors.
Disposal proceeds from these assets are then often re-appropriated and cash is recycled into new investments with greater return fundamentals or utilised to rebalance portfolio gearing.
Sellers, have high-yielding exit expectations, whilst investors are looking for sustainable returns aligned with their funding requirements and asset growth. On sales transactions, this disparity has been dominant over the last year.
Property investment is a long game and there are ups and downs which one should keep in mind when deciding to add property to your investment portfolio. Do you think South African property is still a component to consider having in your wealth portfolio?
South Africa is still a good location for savvy investors to make money from commercial property. However, when purchasing investment and redevelopment property, the choice of asset class is essential, which has to be underpinned by strong fundamentals such as location and tenant covenant.
Property funds have been trying their hands at international investments, with results not necessarily that positive. We have seen a slowdown in the great Africa expansion which was a hot topic recently, with some funds approaching Eastern European markets. What do you think of international diversification versus continued local investment?
I think as long as the fundamentals in South Africa remain pressurised, both people and business will continue to externalise investment capital. Local fund managers have had to look for returns and diversification for shareholders due to poor performance in the local listed sector. Investors that buy shares in the listed sector should look out for local funds that have had an excellent track record and solid asset management teams in foreign markets.
Furthermore, it is always important to understand the assets that underpin the fund to gauge future performance.
There has been a lot of talk around oversupply of accommodation in Cape Town CBD and surrounds with numerous apartment blocks coming out the ground and even more commercial buildings being converted. What is your opinion on this and how do you see the future unfolding?
When driving through the city, the amount of construction still underway is clear to see by the sheer number of cranes on building sites. With this being said, there is still a large pipeline of apartment blocks and other mixed-use developments that are being completed over the next 24 months. With residential assets, investors have been looking to maximise rental returns through long and short-term rentals, however oversupply is eroding these returns.
Overall, I see all this new supply as positive for the city, as the more residents reside in the city, the knock-on effect on retail and office is indisputable. It will take time to propagate and investors should expect slower capital growth as well as negative equity for the time being.
There is a definite world-wide trend towards inner city living. We are seeing the rebirth of densification with residents choosing to live in smaller spaces to enable them to be close to work, access to short-distance transport and nearby entertainment and shopping options at their fingertips.
Areas such as Woodstock and Observatory still offer investors a better balance in terms of purchase price versus rental income, with a steady stream of young professionals and students looking to rent or buy.
The Cape Town CCID has been mapping the trends in the CBD over the last few years, and is an excellent resource for any investor wishing to invest in the city. The Cape Town CBD is still ranked as one of the top cities in the world.
What do you think still has value for investors and how would you advise your clients to approach the sector?
Conversion of asset types from one usage to another still holds a lot of value. For example, conversion of office space into residential or industrial buildings into multi-use properties, i.e. office, storage and light industrial.
Another trend that is gaining momentum is the shared office space model, although still in its infancy in South Africa, it is bound to become a massive disruptor to the office market as we know it. Shared space is no longer restricted to small entrepreneurs, as corporate firms are beginning to see the value of renting these spaces.
Whilst the retail and office landscape is undergoing the winds of massive change, industrial properties still remain the most robust asset class. Industrial assets in the Western Cape are generally excellent investments, with industrial logistic warehouses being the sweetheart of the sector.
It is important to realise that one investors exit affords another investor a potentially “good opportunity.”
We have an approach at Ikon Property Group that “deals are always being concluded”. As a boutique brokerage we have always been nimble with this approach, yielding success for our clients as we are able to source and conclude property deals across all sectors.
A crystal ball scenario: where do you think our local property sector will be in a year from now?
There are many dynamics at play looking into the future, thus whilst we are feeling a shard of positivity at the moment, the lagging effect of the past decade is what is creating our present and future market. Leases that have been negotiated over the last year or two have generally reverted to lower rental rates, especially across retail and office asset classes. Vacancies across all sectors are also higher than they were year on year.
We still find ourselves in a fragile economy with consumers under a large amount of financial pressure with rising costs of fuel, food and consumables.
Generally, we find that businesses are constantly looking at cost cutting measures going forward. New lease deals being concluded are generally based on price sensitivity, efficiencies in space and operational cost optimisation. Landlords who are able to adapt, have the competitive edge. I see them as the top performers over the next few years as they are able to attract and retain tenants.
This being said, there are always pockets of property both geographically and by category that will outperform the market and where investors can create value.
Hopefully we have entered into a period of political stability and we look forward to a forecasted July interest rate cut.
In summary, I believe that being in the local property market is not going to be the smoothest ride and investors will have to work that bit harder to create value and investment return.