What things are there to be optimistic about in the sector?
What is reassuring in the sector currently is that local councils are supporting densification around transit nodes such as the Gautrain route. Our population is growing by roughly 2% a year with 80% of this growth taking place in Joburg and surrounds as the financial hub. These factors alone will sustain a decent, well located property investment and development; especially as Joburg’s traffic continues to worsen.
With South Africa moving into an environment of higher inflation, building costs are sharply escalating and will continue to escalate. Smart developers are using this quiet time to capitalize on contracting construction companies hungry for business, and then focusing on putting resource-efficient buildings into the ground. Building now at current costs enables developers to secure building contracts at cost plus a very low margin. Although construction in tough times seems contrary to what is advised in the media, there is logic behind building now to ensure being “price wise” and having a building in the ground for when the economic cycle picks up again.
It is positive that property remains a good hedge against inflation – when inflation rises, new contracted escalation rates tend to go up, rentals then rise to stay with inflation and as a result, commercial property is very attractive.
Where do the opportunities lie?
There are opportunities in investing around major transit nodes such as Gautrain, Gautrain feeder routes and Rea Vaya routes. A major opportunity to take advantage of is investing in the development of future-forward buildings which are resource efficient. Because water shedding is a reality and electricity supply is unstable, coupled with constant price hikes – if investors can guarantee tenants lower cost of occupation by passing on major saving benefits and off the grid operations, you have a much better chance of securing a solid return on investment. This is of course extremely difficult to do in older buildings, hence the high demand for energy efficient buildings. These constructions effectively circumvent resource shedding and price increases.
What are the investors with a long-term view choosing to invest in – is it urban development in response to migration, or industrial development to support businesses who need to change the way they work to ensure profitability or (environmental) sustainability?
Investors look for the best in terms of both risk and reward long term. Low cost housing for example comes with much bureaucracy, risk and uncontrollable variables. Many investors sacrifice a percentage or two and stick with what they know to ensure long term return.
Sustainability in the property industry and the significant shift to green development is a reality and will continue being vital in future. Property investors and developers should embrace they way they approach the inclusion of green design to incorporate water tanks for water shedding, back up generators and energy-efficient lighting to ensure that their buildings are not only cheaper to run, but can run off the grid for longer. (As we have done in our latest development Atholl Towers in Sandton).
In short – if the sector is a smart place to invest – where are the smart investors putting their money?
Smart investors are putting their money into energy efficient, green buildings and major transit nodes as these locations are likely to bring the best returns. As worldviews are changing, smart investors are also moving long term money into socially responsible investments, which obviously includes greener buildings but also buildings which enhance the environment in which they are placed and further the holistic wellbeing of the occupants of those buildings. Smart investors are also focused on developments that attract tenant profiles with strengths in generating foreign currency. Local tenants with local exposure are unfortunately at the mercy of the rand and its volatility. Securing leases with multinationals locally does makes it easier to weather our economic storm.
In the current financial climate, we are also seeing a trend for property investors to convert direct property investments into more liquid, indirect ownership by exchanging the investment property for shares in listed property.
This may be an attractive option for some investors as with the Rand devaluing as it is, converting money into the US Dollar during a traditional sale could take 4 – 6 months to get liquid cash in hand. At the time of the deal the exchange rate may be 18:1, when the deal goes through is could be 20:1, a substantial loss in asset value. We believe that this strategy could become more and more prevalent. For example, a strategy could be to sell a commercial property to a to a real estate investment trust (REIT), where investors literally exchange bricks and mortar for liquid shares, with shares available for foreign currency conversion at the click of a button.
We’re still finding that wise and experienced investors who understand the commercial property investment space and who have seen many an up and down cycle are patiently waiting for opportunities which will be presenting themselves in the year to come as the inexperienced new comers to the game get jittery and offload investments in haste.