Brent Townes | Chief Operating Officer | Commercial Property | Lew Geffen Sotheby’s International Realty | mail me |
Economic forecasters agree that the world is currently in a stagflation cycle with the possibility of a recession on the cards and commercial property owners who don’t take appropriate action and adjust their thinking stand to lose considerable value on their investments.
This period of high inflation and low growth is exacerbated by high unemployment which means consumer demand led growth out of this cycle is going to be problematic.
And considering that we are only just now emerging from the disruption of the pandemic which significantly impacted the commercial sector, what landlords do – or don’t do – during the next year will have considerable impact on their investments.
The surest long-term investment
With real estate still being considered the surest long-term investment by most people, those considering adding property to their investment portfolios shouldn’t be discouraged – but they should more carefully consider the type of property the buy and also where they invest.
In Cape Town, the picture is a little rosier than in many other parts of the country because semigration is driving the relocation of not only families, but also businesses to the region and this has resulted in a spike in the demand for business premises, not only to rent but also to buy.
In fact, we are starting to see a very high buying demand, with the total value of our current enquiries now standing at R1.04 billion and, bucking the recent trend for industrial properties demand to significantly outweigh other sectors, the majority of our recent queries have been for office space (R380 million) and retail (R394 million) premises.
What’s also interesting is that only 20% of our enquiries are from large investment purchasers whilst 80% are from small and medium-sized business owners who are looking for new homes for their companies.
With that in mind, small and medium enterprises are the backbone of any economy and therefore owners should not only be gearing their businesses to weather the storm, but also their primary investments – their business premises.
Making an investment decision
Potential landlords are advised to do their homework and find out exactly what types of properties are in demand and which are the most sought-after commercial hubs before making an investment.
The industrial sector, which was dominant before the pandemic, has remained robust, although a notable shift has been the growing demand for ‘big box’ industrial spaces rather than the small-to-medium sized properties which were more popular prior to lockdown.
Before the pandemic, we were already experiencing a shortage of very large warehousing space and this has continued with an acute shortage of specific to purpose industrial properties for sale and, in some cases, to let as well. The malls in the retail sector have largely become a landlord’s market, with owners being able to select the tenants they desire.
The high value hubs in Cape Town are: Airport Industria, Bellville, Boquinar, the CBD (including the Foreshore and the Waterfront, which is mainly a leasehold environment), Century City, Epping 1 & 2, Goodwood, Milnerton, Ndabeni, Parow, Westlake, Woodstock and Wynberg.
So, what should one do as the threat of recession emerges?
So far, in the Mother City, it appears that the trend for most commercial property owners is to hold in this cycle or extend their exit timing, where their balance sheets can absorb the threat of rising interest rates (if geared) and low growth.
I recommend the following:
- Relook at the timing of your investment – can you delay or hold through the cycle?
- Assess your tenants carefully – do you have good payers and do you hold enough security, either in deposits and/or suretyships? In commercial real estate, the primary recessionary risk is that a sales decline in tenant businesses results in them not being able to pay their rent.
- Nurture the relationship you have with your quality tenants as they will also help to carry you through the cycle.
- Do you need to land bank now, or can you wait as the market begins to bottom out? Or, if you have to keep your development core skills busy, can you get your pre-sales team to de-risk your project?
- The extension to any Gross Building Area (GBA) to increase lettable volumes should preferably be undertaken with a back-to-back potential lease in place.
- If you hold more than a few properties, assess your geographic risk as well as your asset class risk i.e. shops, vs offices vs industrial vs blocks of flats.
- If your investment is a multiple retail property, can you secure a dual food anchor into your retail space?
- Look at specialised properties where your tenant has invested in either location (especially logistics) or technology or security as they are at a premium to the market.
- What are your gearing terms – are they negotiable or can you switch debt and the fix new rates?
- Zero base your expenses and see what savings can be realised – especially energy efficiency.
In conclusion
Privately owned commercial real estate has historically offered a strong hedge against inflation and can show more resilience than other investments during a recession, but not all asset classes of real estate investments will be able to weather the storm.
Savvy investors who will continue to achieve returns are those who have done their homework and manage their investments well during this period.