October 15, 2018
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Large-scale investment to develop and redevelop SA’s ageing property stock into modern premises for today’s high-tech businesses will only occur once economic growth is on a firm footing.
Compared to many other countries in the continent, SA has a large and diversified pool of property. But a large portion of it is old and outdated, especially in the office and industrial sub-sectors.
Industrial property in general is not looking healthy, with the exception of warehousing. SA’s manufacturing sector is in the doldrums because of slow economic growth and its dependence on Eskom’s costly and erratic power. Even specialised manufacturing nodes – such as a group of interdependent automotive businesses in close proximity – are seen as risky, since the collapse of one company can affect all its neighbours.
Taking a long-term view, SA manufacturing will recover, but investors incur opportunity costs by holding onto industrial property for five to six years until an upswing materialises. In the meantime, fundamental structural changes are taking place. Most of the activity in industrial property is due to shifting, not growth, as successful businesses move out of older properties that were not designed around information technology infrastructure. Older properties are becoming redundant.
Warehousing is sought-after, particularly for logistics businesses, but the demand is for more than simply a shed with a corrugated iron roof. Modern logistics requires laser-levelled floors and automated floor space. The most popular areas for logistics businesses are around Cape Town, Johannesburg and Durban airports. In Johannesburg, the prime area is along the R21 to OR Tambo, where both listed and unlisted family businesses have been active investors and developers, including companies like Fortress and Equites.
Retail property still offers specific opportunities. Of the four main retail categories – super-regional, regional, community and neighbourhood – the growth is in community retail centres. These include Nicolway, Morningside Mall and Benmore Gardens near Sandton, which provide quick shopping for people in surrounding residential areas. They can be convenience centres and sometimes even regional malls like Cresta, which is surrounded by high-density residential units and has little competition from smaller shopping centres.
But super-regional and regional malls in general are battling because they have a significant fashion component dependent on a strong economy and because the global trend is towards shoppertainment. Some of the newer malls like Cradlestone, Forest Hill and Mall of Africa have not yet seen sufficient residential development in their vicinity. Another trend evident in Mall of Africa’s design is the “work, live and play” trend, which means it can satisfy most of the lifestyle needs of residents in its catchment area. But some of the older malls have limited options for redesign and may have to be completely repurposed into hospitals or residential property in the next few decades.
Like industrial property, most of the action in the office sector is due to shifting rather than growth. Blue chip clients like Sasol, Discovery, Webber Wentzel and ENS have moved from older or scattered properties to centralised A- or P-grade offices in Sandton. These are usually “green” buildings with a focus on energy efficiency and recycling. In Gauteng, Sandton and Waterfall remain the most desirable office nodes while in Cape Town it is the Waterfront. In SA’s other urban centres there are no sufficiently sizeable office investment opportunities for institutional investors like STANLIB. We don’t see any revival in demand for the Johannesburg CBD, except for government and residential occupancy.
It will take sustained GDP growth to re-activate the whole office sector, from P- to C-grade. Businesses do not expand and hire new staff until they are certain of growth prospects. So we don’t see a recovery in this sector for several years. Much of the B- and C-grade space is becoming obsolescent and will have to be repurposed.
Although several of the SA-listed property stocks have a residential component, the only focused residential share is Indluplace Properties. In the residential sector, the main investment opportunity remains townhouse developments. There are some companies that specialise in sectors like student accommodation but they remain very small and student rentals are perceived to be risky.
Rapid urbanisation is not an investable opportunity because of the lack of jobs in SA’s cities. Although there is certainly a demand for low-cost housing, there is no income stream to incentivise large-scale private investment.
SA GDP growth of at least 3-4% for a sustained period is needed to re-ignite property development. The earliest sectors to respond will be retail and warehousing and the latest will be office and industrial property. We continue to expect a total annual return (capital and income) from our property portfolios of about 13%, in line with the average of the last 10-15 years.