It was estimated that the commercial real estate industry lost in the region of R6.8 billion in rental income over the lockdown period. Though it’s difficult to quantify as not all the statistics are available, a look at REITs on the JSE recent financial results illustrates just how tough it has been. There are about 34 listed REITs with a current market cap of R360 billion, which has halved in the last six months.
Because REITs are required to pay out at least 75% of their taxable income to their investors, they don’t retain huge levels of capital. Legislation may need to be tweaked to address this. If you are only obtaining capital from shareholders and debt providers, even if you are conservatively geared, when property values start coming down, it’s very challenging for these companies.
Globally, we’ve seen massive disruption and the more heavily geared property businesses have struggled. It doesn’t matter who or what a company is, if you don’t get income for a few months, your balance sheet will suffer.
Currently, many big projects have been either postponed or totally curtailed, but fixed capital investment into real estate has been a good contributor to the South African economy year-on-year, and also benefitted from diversifying internationally. “If you erode continued investment in any way, shape or form, from a legislative point of view, it will be a death knell to the South African economy.
Arguably, you have to be an optimist to build with a 20 to 30-year view. It was a crazy notion to build on Sandton City’s former gravel grounds, but today we can’t imagine Gauteng without the super mall, ditto the V&A Waterfront in Cape Town. These large properties were built in times of uncertainty too.
'Fundamentally about supply and demand'
It’s still fundamentally about supply and demand. If there is demand, there will be development. Entrepreneurial developers might create new cities to attract buyers. Dubai is a good example. In the South African context, we have seen development slow over the past five years, though it is still continuing.
An oversupply in the major property sectors but that the least impact has been felt in the industrial property sector. You have to have a crystal ball to know what comes next. All we know is that not every occurrence in the short term is a long-term trend and we have seen some good office space demand recently and certainly the sector outperformed from a rental collection perspective during the lockdown.
All the negativity has been priced into the REIT share prices in the short term and the discounts to net asset value are significant. These levels could offer great value over the medium to long term. Real estate remains a key pillar of every quality investment portfolio.
The current environment is difficult to navigate and the uncertainty brings a lack of objectivity. When it comes to investments (in property or other asset classes), it’s essential to focus on good financial advice to see you through.
Courtesy of Property 24