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Opportunity exists in chaos and this applies to all industries

Written by Editor

April 18, 2023

By Malcolm Horne, CEO, Broll Property Group

Businesses that had strong strategies in place pre-pandemic – often five-year strategies – saw these plans playing out at an unexpectedly accelerated pace. In our case, our five-year plan, which incorporated strategies around sustainability, continuity, inclusivity, innovation and growth, was implemented within two years.

Businesses that were able to move quickly from survival mode to sustaining their operations and then to securing their businesses were able to garner greater successes in their respective markets.

In our case, success wasn’t what we might ordinarily have defined as success. It related to the people side of the business: there was an enormous amount of growth in their ability to be agile, learn new skills, collaborate and become solutions-driven.

Broll Property Group executives present a consolidated look at how the commercial real estate sector has fared in the “new normal” since the COVID-19 pandemic wreaked havoc in South Africa and around the world. 

Participation in the property cycle is tough but possible

Sean Berowsky, who heads up Capital Markets at Broll Property Group, says following the lockdown, the market (made up of commercial/office, industrial, retail and logistic space) was in a state of semi-paralysis. 

“People were – and still are – particularly concerned about the office sector, which has been most affected by the shift to remote and hybrid working. While office occupancy has not returned to pre-pandemic levels, there are pockets of change. One of the most notable changes is that quality office space was snapped up first, albeit at lower rentals than pre-pandemic ranges. 

“There are, however, areas such as Cape Town where a significant amount of space is being taken up for call centres and where rentals have almost reached pre-pandemic levels,” adds Sean. 

Johannesburg and Tshwane, which have a greater number of developments and larger office areas, have not yet had the same success as Cape Town. “The absorption of office space will take some time to resolve. It is not always possible to transform every office building into a residential (or other) space. That said, these options will be investigated and if there is a case for them, they will be taken up,” says Sean.

 

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He notes that there is unlikely to be any major speculative development for a while. “While there may be some development in particular nodes, it is not expected to reach anywhere near to pre-pandemic levels in the foreseeable future, especially due to a lack of demand and the difficulties funds are experiencing when it comes to raising capital in the debt market.

“In most instances, funds’ nett asset values are higher than their share prices, which means they will be diluting themselves by going to the market. There is a definite trend towards recycling capital through the selling of non-core older buildings, particularly in the office market space.”

Pricing in the retail market is where it was expected to be, with some reversions in the larger retail centres. Convenience and lower-LSM centres have been holding their values well, with investor appetite still intact and positive rental growth.

Logistics has been the clear winner overall. “There is still demand for logistics space, although it is now beginning to slow down as many of the available deals have now been placed. There has also been a high take up of fit-for-purpose industrial space and this seems to be growing,” says Berowsky.

While the property sector with high (and increasing) interest rates is currently a tough environment to operate in, Sean says there are definitely opportunities for investors and landlords to participate in the property cycle. “Investors, who know what they want and stick to their knitting, will do well in certain pockets of the market  and where pricing is marked down because of deflated nett operating income.” 

 

Sustainability and continuity take centre stage

Surine Griffin, Broll’s head of Property Management, says the industry has experienced a notable shift towards sustainability and continuity over the past three years. 

She says the energy crisis has played a major role in compelling property owners to ensure uninterrupted service to their tenants and the public. “Essentially, the pandemic has been replaced by the energy crisis and the other issues raised by Sean. This has seen the implementation of alternative forms of energy such as generators and solar for the provision of back-up power and water supply.”

In addition, the threat of civil unrest has seen increased investment in security measures for properties, especially malls, distribution centres and logistics premises.  

“Malls had to become safer for people who prefer visiting shopping centres as opposed to buying goods online. Greater security measures such as roller shutters and reinforced fencing have been implemented; stricter service level agreements have been put into place with security companies; and many clients have made sure their premises can be fully locked down in the event of an emergency,” notes Surine. 

These and other costs, such as increases in rates and taxes, have made it increasingly expensive to be a landlord, with some of the costs relating to the power supply and related maintenance getting passed on to tenants, but not all. “Top of mind for us as managing agents is to try and minimise cost escalations,” says Surine.

Valuations: a medium- to long-term view 

Head of Valuations at Broll Property Group, Roger Long, concurs with Surine and Sean’s assessments. “From a valuation perspective, the office market has been hardest hit, especially since employees are not fully back at the office and working models (home/office/hybrid) are still being deliberated on.

“In the retail sector, we are witnessing relatively flat rentals, although rental reversions in the more popular regional centres are showing signs of increasing. Activity is picking up in the industrial sector and there is a flattening in demand for logistics buildings. What we are also noticing is greater demand for alternative investments including data centres, hospitals and student accommodation. However, ever-increasing Municipal rates and a high-interest environment are dampening factors.”

Taking a five-year-plus view, he says that the property is a good buy on the stock exchange with total returns of between 10% and 14% expected for 2023. “Lockdown is not the issue now – rather the main issues are energy, the economy and politics. Property is a long-term investment and the sector will bounce back, but it still has a hard climb to reach pre-pandemic levels.”

 

Innovation and solution-focused mindsets key to success

The negative sentiment in South Africa has compelled corporate leaders to adopt solutions-focused mindsets. This is what I have seen in our business: new solutions, new partnerships and new service lines. These are all part of remaining relevant and staying ahead of the curve. 

The reality is, if people run their businesses in the same way they ran them pre-COVID-19, they will find themselves in trouble. We have seen that embracing innovation within the business and allowing business leaders the freedom to be vulnerable and bring their thoughts to the table has had numerous positive spin-offs. 

It is also more proactive to look to the future rather than to linger on the past. Looking past COVID – yes, there have been some consequences of the pandemic that must be managed – I think more businesses are becoming self-sufficient and solutions-focused. 

South Africans are a resilient bunch who know how to celebrate laduma moments, moments of thunder, moments of being allowed to celebrate success and help people through failure. 

I’m not talking property-specific. I’m talking about a mindset of committing to our country, a mindset of growth. We are here, we are going to make a difference. We want to be relevant. This is what I’m witnessing post-COVID-19.

As a nation, one factor is a given: we are able to accept and adapt to left-field circumstances, whether black swan events, energy breakdowns or riots. As South Africans, we have the propensity to look for the silver lining or the next opportunity. It’s part of our DNA. When times are bleak, we are able to focus on people, solutions, innovation, growth and the future – to believe in our country, despite its challenges. 

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