Coronavirus in the Real Estate Environment
Where Tenants, Landlords and Government Meet to Rewrite the Rules
COVID-19 has dealt most industries a heavy blow. Real estate is probably one of the most significantly affected of those, with property shares dropping at approximately 50% across the board locally – and that’s after extended declines in share prices in the last 3 years.
Landlords in all sectors are having to negotiate terms with individual tenants across all classes of property as tenants, particularly in the retail space, are simply not able to meet their rental commitments. COVID-19 is also having a knock–on effect in the residential letting space with many tenants not being paid or having to claim from funds made available to support industry players and individuals hardest hit by the economic blow.
The prevailing sentiment remains one of cooperation and goodwill as South Africans have come together to tackle the crisis head on. We are finding ways of helping each other out of the economic mess we now found ourselves in (albeit largely due to some serious mistakes pre-COVID). We anticipate that post-COVID, resilience will set in and the goodwill dominating our environment will go some way to mitigate the impact in the long road ahead.
Let’s face it, this crisis is not going away overnight, even when South Africa steps out of lockdown. The rest of the world will not necessarily be open for business and certain new habits acquired during lockdown are likely to persist into the future. Furthermore, in the same way as our national budgets are being adjusted, just about every business great and small is revisiting their 2021/22 annual budget forecasts and rearranging and centralising the spend. In short, all business models are getting an overhaul. These are the key points from our team at Commercial Exchange:
1. Companies will not have the luxury of continuing business lines that are unprofitable and excess will be dropped. Take a look at the long history of our national carrier in the first three and half months of 2020! Like SAA, the time is coming where many unprofitable businesses will fizzle out and investors will not mourn their loss, but rather mourn the amounts of wasted capital in trying to keep them afloat. The earlier unprofitable or unsustainable business lines are dropped, the better in the long term as consumers tighten their purse strings. The most important point here is to use COVID as an opportunity to drop what does not work – rather than waiting to see where things go.
2. Essential services such as food, agriculture and medicine will dominate consumer spending post-COVID and these are the long-term winners. We see a radical reduction in large clothing store space in the upper LSM market. An exception is wholesale and discount retailers such as the shops found in Woodmead Shopping centres and township malls. Consumers are going to be looking for a new shopping experience almost immediately and we believe they will buy value items that last rather than junk.
3. Digitisation is in. People have got used to working online, integrating social medial and virtual meetings into their everyday work life. We do not see a resumption of local and international business travel in 2020. We anticipate future travel will be for the experience and business will continue to meet via Zoom and other digital platforms. Not only is this due to a fear of pandemics and containing the virus, it is also more cost effective to meet online rather than drive or fly to a meeting point. Those that do have budget have become highly socially conscious and are likely to redirect some of their funds to “solidarity” style programs and CSI. Conferencing and business hotels are going to take a knock for some time.
4. South Africans have become socially conscious and there is potential for integration in some way between the formal and informal sectors in some way in the future. Food chain stores may start sourcing produce from informal suppliers, for example.
5. The design and layout of office space is going to change. A modified version of social distancing and hygiene practices are likely to become a way of life and we anticipate this to hold into the future. Work spaces are going to de-densify.
6. We anticipate that agriculture and food supply chains will become a central focus. We anticipate food shortages as a knock-on effect of the lockdowns worldwide as imports, transport and food supply chains are interrupted for some time. We believe there will be a growth in local agriculture and the informal agricultural market as people remain focussed on food.
7. We also expect home delivery of cooked food to largely replace restaurant life for some time in the future. Eating out is likely to become expensive (as food outlets increase their prices to cover some of their losses ) and we anticipate that a lot of restaurants could go under.
8. South African ecommerce will boom and industries will change to accommodate this. Industrial property is likely to be more stable as manufacturing business models are less reactive to individual crisis events, with a growth in logistics as ecommerce grows and storage facilities and outlets come into demand.
9. Smart phone transacting is the future. We anticipate a massive shift in mobile transactions. The technology already exists and we anticipate a big shift into improved and safe means of transacting.
10. Built to last. Purchasing gifts of sustainable value and locally produced will replace cheap gifty items in the corporate and personal space, as people will not be willing to spend money on unnecessary throw away items. We also anticipate that there will be a shift to local products as the social consciousness is likely to stay with us for some time.
11. New investors dominating the buy to let residential market will shift into the commercial sector, picking up bargains and benefitting from lower borrowing costs (reduced interest rates). This market is very flexible and able to shift business models quickly.
12. The property sector will fragment slightly with some large players going into near obscurity as their investors flee unprofitable stocks and the rigidity of their historical business models and large property holdings make it impossible for speedy adaptation.
Make no mistake, the property sector has taken a major knock. When the dust settles, not every player will rise from the ashes. We anticipate a difficult and lengthy road ahead but property as an asset class will survive in an modified form. Property stocks are at a very attractive market price and the combination of capital growth and attractive yields are likely to draw investors both locally and internationally to the south African market in the years ahead.