Just for a change, I have posted an article that appeared in the latest Standpoint which is compiled by Stanlib (Volume 4:15 October, 2018) for their clients. The article is not solely about the residential property, but it gives us such a good overview of the property industry and serves well to make the point that economic growth is at the heart of everything we need in our country. Enjoy!
“Large-scale investment to develop and redevelop SA’s ageing property stock into modern premises for today’s high-tech businesses will only occur once economic growth is on a firm footing. Compared to many other countries in the continent, SA has a large and diversified pool of property, but a large portion of it is old and outdated, especially in the office and industrial sub-sectors.
Industrial property in general is not looking healthy, with the exception of warehousing. SA’s manufacturing sector is in the doldrums, because of slow economic growth and its dependence on Eskom’s costly and erratic power. Even specialised manufacturing nodes – such as a group of interdependent automotive businesses in close proximity – are seen as risky, since the collapse of one company can affect all its neighbours.
Taking a long-term view, SA manufacturing will recover, but investors incur opportunity costs by holding onto industrial property for five to six years until an upswing materialises. In the meantime, fundamental structural changes are taking place. Most of the activity in industrial property is due to shifting, not growth, as successful businesses move out of older properties that were not designed around information technology infrastructure. Older properties are becoming redundant.
Warehousing is sought-after, particularly for logistics businesses, but the demand is for more than simply a shed with a corrugated iron roof. Modern logistics requires laser-levelled floors and automated floor space. The most popular areas for logistics businesses are around Cape Town, Johannesburg and Durban airports. In Johannesburg, the prime area is along the R21 to OR Tambo, where both listed and unlisted family businesses have been active investors and developers, including companies like Fortress and Equites.
Retail property still offers specific opportunities. Of the four main retail categories – super-regional, regional, community and neighbourhood – the growth is in community retail centres. These include Nicolway, Morningside Mall and Benmore Gardens near Sandton, which provide quick shopping for people in surrounding residential areas. They can be convenience centres and sometimes even regional malls like Cresta, which is surrounded by high-density residential units and has little competition from smaller shopping centres, but super-regional and regional malls in general are battling, because they have a significant fashion component dependent on a strong economy and, because the global trend is towards shoppertainment.
Some of the newer malls like Cradlestone, Forest Hill and Mall of Africa have not yet seen sufficient residential development in their vicinity. Another trend evident in Mall of Africa’s design is the “work, live and play” trend, which means it can satisfy most of the lifestyle needs of residents in its catchment area, but some of the older malls have limited options for redesign and may have to be completely repurposed into hospitals or residential property in the next few decades.
Like industrial property, most of the action in the office sector is due to shifting rather than growth. Blue chip clients like Sasol, Discovery, Webber Wentzel and ENS have moved from older or scattered properties to centralised A- or P-grade offices in Sandton. These are usually “green” buildings with a focus on energy efficiency and recycling. In Gauteng, Sandton and Waterfall remain the most desirable office nodes while in Cape Town it is the Waterfront. In SA’s other urban centres there are no sufficiently sizeable office investment opportunities for institutional investors like STANLIB. We don’t see any revival in demand for the Johannesburg CBD, except for government and residential occupancy.
It will take sustained GDP growth to re-activate the whole office sector, from P- to C-grade. Businesses do not expand and hire new staff until they are certain of growth prospects. So we don’t see a recovery in this sector for several years. Much of the B- and C-grade space is becoming obsolescent and will have to be repurposed, although several of the SA-listed property stocks have a residential component. The only focused residential share is Indluplace Properties. In the residential sector, the main investment opportunity remains townhouse developments. There are some companies that specialise in sectors like student accommodation but they remain very small and student rentals are perceived to be risky.
Rapid urbanisation is not an investable opportunity because of the lack of jobs in SA’s cities. Although there is certainly a demand for low-cost housing, there is no income stream to incentivise large-scale private investment. SA GDP growth of at least 3-4% for a sustained period is needed to re-ignite property development. The earliest sectors to respond will be retail and warehousing and the latest will be office and industrial property. We continue to expect a total annual return (capital and income) from our property portfolios of about 13%, in line with the average of the last 10-15 years.”
Our kind acknowledgements to: Ahmed Motara (Listed Property Portfolio manager) and Lawrence Koikoi (Listed Property Portfolio manage)
I really enjoyed this article. It gives a drone-view of what’s going on and enables us to consider our actions going forward. It is factual rather than negative or sensational. We all know the truth that economic growth is at the heart of what we need. Bill Clinton was right in his campaign: “It’s the economy, stupid.” I remain circumspect, but grateful for the effort our President is putting in in this regard – strength to your arm, Mr President.
And secondly, I was seriously impressed with the following announcement by ABSA. Can you imagine what it would be like if a PPP could pull off anything close to this!?
Announcement: Absa’s position on Land Reform
We have noted the ANC’s announcement that it will propose an amendment to S25 of the Constitution in order to facilitate land reform and redistribution. We recognize the legacy of the past and the need to address the inequalities in our country. We are fully supportive of land policy and legislation that fulfils the intent of our Constitution and address the need for land among many South Africans.
We must also emphasize that this must be done in a manner that balances the needs of current and future private landowners, beneficiaries, government, the financial sector as well as its stakeholders.
We have noted the ANC’s undertaking that its proposal is for land expropriation to be done in a manner that doesn’t undermine the economy and that increasing agricultural production and food security will be a key priority.
Absa has made its own submission to Parliament after commissioning extensive research on the matter, including taking legal opinion on the efficacy of S25 of the Constitution. As a consequence, we do not believe that a constitutional amendment is necessary. Instead, Absa has identified five key areas through which the bank can make a meaningful contribution towards a sustainable land reform agenda.
1. The establishment of a special rural land reform fund, which would be funded by financial sector players and other organizations. The main objective of the fund would be to establish a new black commercial farming class.
2. The establishment of a special urban land reform fund. The fund would be geared towards building an affordable housing market that improves the affordability of urban housing and facilitate urban densification efforts as well as inner-city rehabilitation processes. It would also focus on creating a bigger class of black property developers.
3. The establishment of a land administration agency, a public-private partnership. Its priorities would include auditing the productivity and use of land which has been transferred through land reform and re-engineering the cumbersome processes through which land restitution claims are assessed and settled.
4. Support for the development of a new land administration system for the design and piloting of a new lands records system. This is especially important in former homeland areas where administration systems are not existent.
5. Driving a national dialogue for a new land policy white paper. There is a need for a new land policy White Paper that would culminate in an agreed national land policy.
We now await the outcome of the Constitutional Review Committee’s consultations and the rest of the parliamentary process before we can determine our next course of action.
Managing Executive, Home Loans”
Never lose hope. Die hoop beskaam nooit. Translated – You’ll never be embarrassed by hoping for the best.
Yours in Property.