The South African property market has struggled during the COVID-19 pandemic, with virtually every sector seeing a decline in performance. That’s according to a new report from JLL, a leading professional services firm specializing in real estate and investment management. The report – South African Real Estate Investment Review and Outlook 2021/22 – examines commercial property investment activity in South Africa. Key sources of information include publicly available databases and resources and interviews with industry stakeholders. The reports focus on deal flow recorded in the calendar year 2021 and compare investment volumes in 2021 to deal flow in the previous four years.
“The value of deal flow in office and industrial declined compared to 2020, with a reprieve in 2021 attributed to the retail, alternative real estate and housing sectors. gas stations have emerged as a growing asset class in 2021, and demand has remained strong for prime logistics and retail assets,” said Mieke Purnell, Head of Research, JLL.
According to the report, investment in office property has continued to decline since 2018 as the local economy weakened and the sector faced an oversupply scenario. Despite the sharp decline that occurred in 2020, the office sector remained under pressure in 2021 as many of the adverse factors from the previous year remained prevalent. The investment attractiveness of this sector has been particularly limited by weakened rents, high vacancy rates and a drop in demand during the pandemic, with limited room for improvement. The overall investment value of this sector reached around R2.6 billion in 2021, down 18% from the reported R3.1 billion in 2020.
The main office transactions in 2021 were generally sale-leaseback transactions related to large companies, such as the Telesure Campus transaction in Dainfern, or associated with redevelopments and renovations, such as the disposal and acquisition of 1 Thibault Square. According to Pepler Sandri, Director: Capital Markets, JLL, the average sell rate data reflects a bifurcation in the market, with blue chip stocks reaching relatively favorable rates. In contrast, lower quality stock in the weaker nodes realized significantly lower prices, especially relative to replacement cost.
Like other sectors, the commercial real estate sector suffered from initial foreclosure restrictions, but has shown resilience in 2021. The staggered nature of mall lease expiration profiles, as well as rental reversions negative pressures, lower indexation rates and shorter lease terms (none of which have been unique to the retail sector), continue to hamper the performance of the sector, which is perceived to be underperforming. The overall transaction value in the retail sector increased by ±17.6% in 2021, actually exceeding the values reported during the historical five-year period. The number of transactions has declined, but the total leasable area of transactions has also improved through 2021. Retail transactions are expected to represent approximately 34% of total transaction flow activity, which remains at the level of values of investment reported for 2020. This is according to Sandri, who continues that the revenue performance of commercial real estate increases as vacancies are filled, and landlords seek alternative sources of income through the installation traffic signs or photovoltaic solar systems, for example. Regardless of the headwinds encountered, investment in the retail sector showed strong growth in 2021, rising by 18% to peak at just over R7.0 billion.
The retail sector saw several landmark deals in 2021, including the completion of the sale of Atterbury Value Mart for over R1 billion, and Nicolway Shopping Center deals at record yield, also topping the billion rand. Looking ahead, JLL is involved and aware of several large shopping center deals currently in the pipeline, although it remains to be seen whether the investment in 2022 will reach R7 billion or more.
Following the aberrant transaction volume recorded by the industrial property sector in 2020, investment volumes dropped significantly in 2021. Comparing investments in 2021 to those before the pandemic, it is obvious demand fundamentals remain strong. As an example, JLL advised on the recent sale of the 145,000 sqm DSV campus to Plumbago which traded for R2.05 billion in 2021, accounting for nearly half of all deal flow in the sector for the sector. ‘year. Further investment in industrial property is currently limited by the lack of base stock available, rather than a lack of demand.
The alternative and living sectors recorded a record year. This sector was dominated by student residences, residences for the elderly and mid-range rental units. Data centers were added to the pool of non-traditional real estate investments in 2020, and in 2021 gas stations emerged as having a strong investment volume. The exceptional performance of the alternative and housing sector is mainly the result of the change of hands of two of the largest student housing portfolios, and unless a similar extraordinary agreement is finalized this year, the investment volume will not reach probably not the record of R6.6 billion reached last year. .
Of all the real estate sectors, hotels and lodging establishments have perhaps been the hardest hit by the pandemic. Difficult operating conditions driving down capital values have created an opportunity for investors with longer-term prospects to purchase hotels at well below replacement cost. Additionally, the pandemic-induced slump in hotel development (as well as office and shopping center) activity should help the recovery as the inventory situation recovers. Investments in the hotel sector in 2021 were not limited to direct property sales, but also included the restructuring of operating and rental agreements. A major hotel sale recorded in 2021 is the Zimbali Resort in KwaZulu Natal.
“Despite the adverse effects occasioned by the COVID-19 pandemic, investment activity is being supported by the fact that debt capital is becoming more affordable than ever thanks to lower lending rates. assets, this has led to an ideal investment climate for investors anticipating a medium to long-term recovery,” Purnell added.
The report concludes that annual economic growth trends are expected to stabilize (decline) to pre-pandemic levels as the extraordinary stimulus measures come to an end. Local and global interest rates are rising; however, lending rates are still expected to remain below levels seen before the global financial crisis.
Looking ahead, Sandri suggests that “green shoots of growing investor appetite are emerging, and 2022 should be a strong year from a commercial real estate investment sales perspective, with several prominent deals already underway.”