The Month in Review August 2021
Digging Deeper into the Office sector as an Investment Option, and a Look at the International Investment Trend of Reitz Companies into Eastern European Markets
Digging Deeper into the Office Sector
This month we look at the office sector in more detail as we are seeing opportunity in what has been considered a very unattractive market. First up we are analysing how deep the decline is.
Below are two graphs supplied by SAPOA for the second quarter of 2021. As we can see, the vacancy rate (using the second quarter as a reference) has experienced its most significant increase (particularly in Premium, A and B grade offices in the second quarter of 2021). C grade offices have levelled off at around 22.6%. The asking rental rates have experienced a corresponding decline (as reflected in the second graph).
Many landlords are looking at selling off office buildings for repurpose for residential and other use.
We believe this is a favourable time to invest in office as an asset class, provided the deal is structured in line with the current market value of the building and appropriately discounted to the existing market weaknesses. There are several reasons for a weak outlook in the office sector such as;
- Businesses having adapted to a work-from-home environment during the pandemic
- Businesses are struggling in the current market climate
- Tenants are demanding shorter leases (5–10-year leases reduced to 3-year leases)
- Less space in demand due to smaller companies
- An overall weak economy
However, the fact remains that markets work in cycles and overseas markets are showing recovery.
What is the Potential?
Should a building be available at a reduced price with some occupancy, or the buyer having a potential to let and accommodate current market demands? Now is probably the best time to buy for investment purposes in what could be a very lucrative market. A partially tenanted building at a market-appropriate yield need only increase occupancy in a future recovering market, this would substantially improve the overall value of the acquisition.
Commercial Exchange has listed a few buildings recently in prime locations and are discounted to fit these criteria. To view some of these properties, click here.
Markets move in cycles. All indications are that businesses following a “work-from-home” model as a result of the pandemic are not likely to stay that way once the pandemic is over. The consensus is that businesses are able to sustain themselves in a “work-from-home” environment, but do not grow because the absence of team interaction and co-working makes business development challenging. Businesses need an office environment to grow. Admittedly, many companies have suffered economically and may only agree to shorter term leases with an annual option of review clause and many companies may request smaller office space, but the need for office space is going to gain momentum in the middle to long-term. This weak cycle will shift in the future to something better.
Eastern European Markets
There has been a growing trend over the years amongst Reitz companies in South Africa to invest in Eastern European markets, which we found very interesting. Moneyweb has written a brilliant article on this which you can read here.
Approximately one third of all Reitz companies in South Africa invest in Eastern Europe for these reasons:
- Provides access to the EU market
- These countries have good development potential
- It is possible for a South African company to hold a significant portfolio in a small market where they may have difficulty competing in large established markets like the USA and UK
- There is promising growth potential within certain markets that are doing well such as industrial and residential
Poland and Romania appear to be the strongest and most attractive options. Compared to South African markets, which offers a higher yield and inflation rate, a typical yield in Poland or Romania would be 7%, whereas South Africa currently is 9-11% and investing in these countries means sacrificing contractual growth. Only CPI growth. Gearing (lending rates) are around 2.5% growth in leases will allow investment attractiveness. On the whole, prospects for economic growth in these countries are more appealing than South Africa.