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OPINION: Cape Town – A Mixed Bag of Challenges and Opportunities

Editors Note: The following content has been provided by Rob Odendaal, Commercial Property Director in Cape Town for Lew Geffen Sotheby’s International Realty.

Whilst the onset of the pandemic has significantly impacted the commercial sector, it’s not all doom and gloom, and there are ample opportunities for investors and landlords to harness the market shifts and translate them into opportunities if they remain flexible and do their homework.

Landlords and investors were caught off-guard by the multiple shifts that have occurred since January last year when Covid-awareness first began.

Just 18 months ago, all property sectors in the city were still in strong demand, and there were keen investors vying for a limited supply of investment-grade buildings in Cape Town, most of which were quality assets offering excellent returns.

But by the end of the first quarter in 2020, hospitality, offices and retail were already beginning to bear the brunt of the initial lockdown, while the move to working remotely and online business saw technology companies and logistics and warehousing businesses flourish.

Shot of commercial properties in Cape Town.

According to a recent JLL report, South Africa’s economic growth of 1.5% in the fourth quarter of 2020 is largely attributed to a rebound in the manufacturing and trade sectors, which further strengthened the industrial sector, with the three coastal metros displaying the most resilience.

The Western Cape, in particular, continues to see well-positioned high-quality industrial and warehouse stock outperform most asset classes, with logistics facilities operating in the food, beverage and pharmaceutical industries being most active.

inside an industrial warehouse
Industrial units are in great demand.

Industrial logistics and warehousing properties of between 250m² and 750m², as well as large units in excess of 5 000m², are currently in great demand, with shortages being seen in some areas.

This sector is also being fuelled by the growing owner/occupier market, most notably in the manufacturing, warehousing, logistics, car repair and auto detailing fields.

The office sector, on the other hand, continues to be oversupplied, and with remote working proving to be a successful formula for many companies, the market in this sector is unlikely to pick up any time soon.

 

A number of landlords are now repurposing their properties, and although this is a great idea, they must do their homework and ensure they cater to the right market.

For instance, in some areas where buildings are being converted to residential dwellings, it’s causing an over-supply of stock to market as the absorption rate in these suburbs cannot keep pace.

COVID has meant that the hotel industry is operating below normal expectations.

Similarly, with buildings being converted into managed hotel units as occupancy and yields are currently very low and unlikely to improve until international travel resumes.

The best option to ensure that you are able to continue paying operating costs and servicing debt finance without interruption would be to secure your existing tenants through rental reversions and adjusted escalation terms.

It’s also vitally important to be flexible and to remember that the pandemic and the flailing economy is affecting everyone but that given half a chance, most people will rise to the occasion.

So, if you cannot retain existing tenants and are battling to find new ones on the same terms, provide shorter, more flexible leases at reduced rentals to make it affordable for good prospective tenants.

I’d argue that property professionals also need to shift their focus in order to remain relevant and viable players in the market.

Although we still have a hand in the office, development land and commercial sectors, we’ve shifted our focus to industrial and retail which has resulted in a significant increase in property sales and new leases being signed.

So, although the average length of leases decreased from 4.5 to 2.5 years and the average lease value declined by 20% during the first six months of 2021, we know that this was the right move to make as we have seen a whopping increase of 190% increase in transactions.

Ultimately, an empty property is not an investment. It’s a liability. And, as Darwin said, “it’s not the strongest and fittest that survive, but those most easily able to adapt.”

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