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How #SONA2019 will affect commercial property sector

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Property investors’ insights into how they currently view the sector

Lasta week’s biennial South African Property Owners’ Association (Sapoa) national conference delivered sobering news about the country’s commercial property sector in the current economic environment.

Held at the Cape Town International Convention Centre, the conference is an opportunity for the industry to take stock, both within the local economy and the broader international arena, specifically on how the sector fares as an investment destination.

In his keynote address at the conference, Britain’s Lord Peter Hain said President Cyril Ramaphosa’s stated objective to eradicate corruption was laudable, but would take time.

Standard Bank Securities head of equity research, Bandile Zondo, said South Africa’s governance issues were not the problem. Zondo said the big issue was an economy struggling under pressure, as reflected in the first quarter gross domestic product (GDP) figures. The country experienced the worst drop in GDP since the same period in 2009 during the global financial crisis.

“The property sector correlates to the economy,” Zondo said, reflecting on what property sector investors can anticipate in 2020.

The conference ended on the same day that Ramaphosa delivered his third State of the Nation Address.

John Jack, chief executive of Galetti Corporate Real Estate, breaks down for us how the first SONA under the new Cabinet will affect the commercial property sector:

The South African retail sector remains under pressure. Picture: Marcin Kempa

Listed Property Sector

The Sapoa convention highlighted the difficulty the listed sector is having raising capital and speculation about its attractiveness for investors.

This creates opportunities for private investors and owner-occupiers who don’t have to compete against the funds for stock brought to market. If the investment strategy Ramaphosa has planned gains traction, we could see a swing back to investors focusing on the REIT space.

Eskom

It’s no surprise the Eskom crisis is a number
one concern for any investor looking at South
Africa and the business sector was waiting
with bated breath for clarity around this
during SONA.
Little detail was given of Ramaphosa’s
plans to restructure the power utility into
three entities – generation, distribution
and transmission.

But he did announce
Eskom would receive a larger portion of the
R230billion support promised in February’s
budget sooner than expected. The Energy
Availability Factor (EAF) has improved
significantly post elections, not dropping
below 70% since early May.

However we
need an EAF of 75% and above to support
moderate growth projections. This funding
will hopefully ensure no interruptions, which
comforts manufacturers and the economy as
a whole.

We don’t see anyone making any
immediate expansion moves until we get
a clear picture of who will be appointed to
restructure the facility and how they plan to
do so.

During the days that followed the general
election, Galetti noticed an up-tick in activity
and trading in the commercial property sector.
“We expect a little of the same following
SONA, but we need to remember property is
typically a longer investment strategy of five to
10 years.”

Master Plans

The “master” plans to develop textiles,
steel, clothing, gas, chemicals and
renewables is “excellent news” for the
commercial property sector. Growing these
industries will drive demand for properties
in key nodes around the country.

As these
industries attract more investment, we can
expect to see more occupiers taking up
space which will drive up rents. 

Economy

Ramaphosa has a tough task to improve
economic growth, particularly because the
GDP for the first quarter was the worst
drop since the same period in 2009.

But the president confirmed the private
sector had committed R840bn in 43
projects which would stimulate growth
in numerous sectors and create jobs. 

The
state confirmed it will build a pipeline of
investments to be showcased at the second
investment conference later this year, which
is promising considering that R300bn
was raised as a result of the inaugural
investment conference last year.

This will
have a significantly positive impact across
the commercial property sector.
The discussion about a smart city is
interesting, but didn’t seem to give much
insight as to what it means.
Joburg CBD strikes us as a huge
opportunity. To redevelop the once iconic
city now will meet significant challenges since the business district moved to
Sandton decades ago.

Inner-city landlords
will be listening to hear what incentives
may be coming their way. Crime and
grime is rifewith only certain precincts
managing to get it right, such as Ghandi
Square.

The anticipated interest rate cut next
month will be a welcome breather for
landlords with empty properties who
are paying bonds. Property owners will
be pleased with this cut as many view
decreases in rental income.

The state aims to reduce the cost of
doing business by reducing export tariffs
and making rail transport more efficient
and competitive, while making it easier for
new companies to be registered.
By removing complicated regulatory
processes and reducing the high cost of
international companies doing business
in South Africa, we can expect far more
interest from investors.

Land Reform

Ramaphosa said faster economic growth
also required accelerated land reform in
rural and urban areas and a clear property
rights regime. This will continue to be an
area of concern for investors.

Not much
further clarity was given by the president.
But he did confirm that R3.9bn has been
allocated to the Land Bank to support
black commercial farmers.

Consumer Price Index

Stats SA released figures confirming the
annual consumer price inflation was 4.5%
in May 2019, up from 4.4% in April
2019. Two of the main contributors to the
inflation rate were food and non-alcoholic
beverages, which impact consumers
directly and thus disposable income that
could be directed to the rest of the retail
sector, which is already under significant
pressure. We have seen several Edcon
shops downsizing.

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