Broll Property Group executives look at how the commercial real estate sector has fared since the pandemic wreaked havoc in SA and around the world
The three years following hard lockdown brought home the message that opportunity exists in chaos. This is the biggest take-away for Group CEO of the Broll Property Group, Malcolm Horne, who says that, although this may apply especially to the property sector, it is relevant to all industries. Businesses that had strong strategies in place pre-pandemic – often five-year strategies – saw these plans playing out at an unexpectedly accelerated pace.
“In our case, our five-year plan, which incorporated strategies around sustainability, continuity, inclusivity, innovation and growth, was implemented within two years,” he says. “The success wasn’t what we might ordinarily have defined as success. It related to the people side of the business: there was an enormous amount of growth in their ability to be agile, learn new skills, collaborate and become solutions-driven.”
Sean Berowsky, head of capital markets at Broll Property Group, says the commercial/office, industrial, retail and logistics market was in a state of semi-paralysis after lockdown.
“People were, and still are, particularly concerned about the office sector, which has been most affected by the shift to remote and hybrid working. While office occupancy has not returned to pre-pandemic levels, there are pockets of change such as quality office space that was snapped up, albeit at lower rentals than pre-pandemic ranges.
“However, areas such as Cape Town saw a significant amount of space taken up for call centres and rentals have almost reached pre-pandemic levels,” says Berowsky.
MOTHER CITY REIGNS
Despite having a higher concentration of developments and larger office spaces, Johannesburg and Tshwane have not achieved the same level of success as Cape Town. “The absorption of office space will take some time to resolve,” says Berowsky. He notes that funds are unlikely to engage in major speculative developments for the foreseeable future due to a lack of demand and difficulties in raising capital in the debt market.
“There is a definite trend towards recycling capital through the selling of noncore older buildings, particularly in the office market space.” Pricing in the retail market is where it was expected to be, with some reversions in the larger retail centres. Convenience and lower-LSM centres have been holding their values well, with investor appetite still intact and positive rental growth.
Berowsky also says that the logistics sector has been the clear winner overall, as there is still demand for logistics space, although it is slowing down as many of the available deals have been placed. He says there are still opportunities for investors and landlords to participate in the property cycle, especially in certain pockets of the market where pricing is marked down due to deflated nett operating income.
NEW LINES OF THINKING KEY TO SUCCESS
Surine Griffin, head of property management at Broll, noted that the industry has experienced a shift towards sustainability and continuity and property owners are now implementing alternative forms of energy such as generators and solar for back-up power and water supply. Security measures for properties, especially malls, distribution centres and logistics premises, have also been increased due to the threat of civil unrest. However, these measures have increased costs for landlords, and Broll is committed to minimising cost escalations.
“Malls had to become safer for people who prefer visiting shopping centres as opposed to buying goods online. Greater security measures such as roller shutters and reinforced fencing have been implemented; stricter service level agreements have been put into place with security companies; and many clients have made sure their premises can be fully locked down in the event of an emergency,” says Griffin.
MEDIUM TO LONG VIEW
Roger Long, head of Valuations at Broll, concurred with Berowsky and Griffin’s assessments, saying that from a valuation perspective, the office market has been the hardest hit. “In the retail sector, we are witnessing relatively flat rentals, although rental reversions in the more popular regional centres are showing signs of increasing. Activity is picking up in the industrial sector and there is a flattening in demand for logistics buildings. We are also noticing greater demand for alternative investments including data centres, hospitals and student accommodation.”
Long also says that the industrial sector is picking up, and there is a flattening in demand for logistics buildings. He considers property a good buy on the stock exchange with total returns of between 10% and 14% expected for 2023. “Lockdown is not the issue now – energy, the economy and politics are problems. Property is a long-term investment and the sector will bounce back, albeit a hard climb.”
PLANNING AND RESILIENCE BRING SUCCESS
Jason Griessel, who heads up strategic risk management at Broll, says the pandemic was an exercise in business continuity and resilience. Griessel noted that businesses had to scale their operations to enable communication during the pandemic and that this exercise has set the scene for success in the future. “During the pandemic, businesses had to determine how to scale their operations to enable communication – both upwards and downwards.”
When the pandemic hit SA, businesses that were better prepared for emergencies started to gain market share. This was also evident during the KwaZulu-Natal riots where some vendors and service providers were unable to deliver. This created a gap for others who were better prepared to thrive.
While the pandemic may largely be behind South Africans’ backs, the energy and other economic setbacks mean businesses must ensure they identify, train and support the people who have been tasked with operating their business continuity plans. “No artificial intelligence tool can replace employees because crises require personal and interactive inputs and processes,” says Griessel.
FUTURE OUTLOOK
Horne says that South African business leaders are adopting a solutions-focused mindset in response to the negative sentiment in the country. Embracing innovation and allowing vulnerability in business leaders has had many positive outcomes. Instead of dwelling on the past, businesses are looking to the future and becoming more self-sufficient and solutions-focused.
“South Africans have a resilient mindset and are able to adapt to unexpected situations,” he says. “They focus on people, solutions, innovation, growth and the future. Despite challenges, they believe in their country and its potential for success.”
