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The Month in Review July 2021

The Month in Review July 2021

Widespread destruction of Property, Ratings Agency Downgrades. Is it Time to Revisit “Offices” as a Potential Investment Opportunity?

For Commercial Property Landlords, particularly those heavily invested in KwaZulu-Natal and major townships in Gauteng, the riots that took place from 9 to 16 July were the worst in recent history. The International visuals of Durban CBD and other areas of the country did not bode well for the nation’s image as an investment destination. According to SAPOA,  261 malls suffered damage, 161 extensively damaged, 200 liquor outlets were destroyed, 1400 ATMs were damaged and 1735 retailer stores were impacted. The loss in terms of GDP was approximately R50-billion.

Despite the damage caused, it was heart-warming to see South Africans standing together to protect, support one another and clean-up once the chaos was over.

Another concerning piece of news that came out in the second week of July, was the announcement by ratings agency Moody that municipalities in South Africa including Johannesburg, Tshwane and Cape Town had their credit rating adjusted downward, further into sub-investment grade. This is as a result of their assessment of the ability of the municipalities to recover their costs and thereby the risk of tapping into cash reserves as a direct result of  the Covid-19 pandemic as well as announcements by municipalities of irregular expenditure in the region of R16-billion. The implications are that the cost of debt is going to be more expensive, and those who live or do business in these municipalities are likely to feel the impact of even higher rates-charges and possibly reduced services as budgets are cut. This is a wake up call to all of us that, as a country, we need to realise we are better than a sub-investment grade country and we don’t belong in the junk status pile.

Examining the comparative national credit ratings in more detail, our country’s rating is below “investment grade” and described as “speculative” (“speculative” means the country is still good for investment, albeit from a different type of investor at a cheaper price). The yields and returns should be much higher than more “stable” markets for a speculative investment., (For a more detailed understanding of the impact of ratings, here is a link to a description from Ashburton Investments last year.

“Where others see obstacles – we see opportunities” – the “Speculative Investor”

Our President rightfully says that this could be a time for renewal. For those who invest in the country heavily, particularly private commercial property investors and the Reitz Companies, it really is beginning to feel like we take two steps forward and eight steps backwards. Reviewing comments from property companies, in which many indicated they were likely to rebuild the malls that were damaged, some indicated they would not be investing further in these assets in the future. In 2018/19 South African Commercial Property Investors were amongst the highest investors offshore. All is not lost, but these companies have other, more attractive options. The Biznews TV interview with Jason McCormick is very insightful regarding what was happening on the ground. The McCormick family are big shopping centre owners in Township and Rural areas:

“There are no bad days in the market. When the market is down, you’ve got bargains, and it’s lovely to think of what you are buying at low prices. When the market is up, the bargains have gone, but you’re rich.”Bruce Greenwald of First Eagle Funds

Office is one asset class property companies have been avoiding for some time and the reasons are obvious. The office market has been declining over the years locally, due to the general decline in the economy, and in particular over the last year following the outbreak of the pandemic, the direct impact on businesses and the shift to a work from home scenario in many businesses and subsequent discovery by many companies, that they can actually work from home. Offices are also the only asset class that saw further decline in the first quarter of this year.

However, offices themselves are beginning to look more attractive from a price perspective. Quality office parks are now becoming available at good prices with some tenancy in place. Buying an office park with a 50% occupancy at a 10% yield provides tremendous upside potential, all one needs to do is improve occupancy to improve the yield. Here a is a listing of the one such office parks:

This attractive, well-maintained office park has declined in value by 50% in 3 year period.  With more than a 60% vacancy rate, it should be relatively easy to improve value through occupancy improvements. Over the next few weeks we are going to be highlighting a number of these opportunities.

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