• Mon. Nov 28th, 2022

Protecting commercial real estate investments in times of economic turbulence

ByWillie M. Evans

Aug 18, 2022

Economic forecasters agree that the world is currently in a cycle of stagflation with the possibility of a recession on the cards and commercial property owners who fail to take appropriate action and adjust their thinking stand to lose considerable value on their investments.

So says Brent Townes, Commercial Property COO for Lew Geffen Sotheby’s International Realty in Cape Town, who adds that in South Africa, this period of high inflation and low growth is exacerbated by a high unemployment, which means consumer demand has driven growth out of this cycle. is going to be problematic.

“And given that we are just emerging from the disruption of the pandemic which has had a significant impact on the commercial sector, what owners do – or do not do – over the next year will have a considerable impact on their investments. .”

Townes adds that with real estate still considered the safest long-term investment by most people, those considering adding property to their investment portfolios shouldn’t be discouraged – but they should look more carefully the type of property to buy and also where they invest.

“In Cape Town, the picture is a bit rosier than in many other parts of the country as out-migration is causing not only families but also businesses to relocate to the area, which has led to an increase in demand for business premises. , not only to rent but also to buy.

“In fact, we are starting to see very high demand for purchases, with the total value of our current claims now standing at R1.04 billion and, contrary to the recent trend in industrial property demand at Far outweighing other sectors, the majority of our recent queries have been for office space (R380m) and commercial premises (R394m).

“What’s also interesting is that only 20% of our inquiries come from large investors, while 80% come from small and medium-sized business owners who are looking for new housing for their business.

“With this in mind, small and medium-sized businesses are the backbone of any economy and therefore owners should not only prepare their businesses to weather the storm, but also their main investments – their business premises.”

Townes advises potential landlords to do their homework and know exactly what types of properties are in demand and which malls are in high demand before making an investment.

“The industrial sector, which was dominant before the pandemic, has remained robust, although one notable change has been the growing demand for ‘big box’ industrial space rather than the small to medium-sized properties that were more popular before. the lock.

“Before the pandemic we were already experiencing a shortage of very large warehouse space and this has continued with an acute shortage of specific industrial properties for sale and in some cases for rent as well.”

Townes adds that malls in the retail sector have largely become a landlord’s market, with landlords being able to select the tenants they want.

It lists the high value hubs in Cape Town as being: Airport Industria, Bellville, Boquinar, the CBD (including the foreshore and waterfront, which is primarily a leasehold environment), Century City, Epping 1 & 2, Goodwood, Milnerton, Ndabeni, Parow, Westlake, Woodstock and Wynberg.

“So far in the parent city, it seems the trend for most commercial property owners is to hold this cycle or extend their exit lead time, where their balance sheets can absorb the threat of higher rates. interest (if suitable) and low growth.

So what to do when the threat of recession emerges? Townes recommends the following:

  • Revisit the timing of your investment – ​​can you delay or hold the cycle?
  • Evaluate your tenants carefully – do you have good payers and do you hold enough collateral, whether in the form of deposits and/or bonds? In commercial real estate, the main risk of a recession is that a decline in sales by tenant businesses prevents them from paying their rent.
  • Maintain the relationship you have with your quality tenants, as they will also help support you through the cycle.
  • Do you need to land now or can you wait for the market to start bottoming out? Or, if you need to occupy your core development skills, can you ask your pre-sales team to de-risk your project?
  • Extension to any Gross Building Area (GBA) to increase letting volumes should preferably be undertaken with a potential back-to-back lease in place.
  • If you own more than a few properties, assess your geographic risk as well as your asset class risk, i.e. stores, offices, industrial and buildings.
  • If your investment is a multi-store building, can you guarantee a dual food anchor in your retail space?
  • Look at specialty properties where your tenant has invested in either location (especially logistics) or technology or security, as these are more expensive than the market.
  • What are your debt terms – are they negotiable or can you switch debt and set new rates?
  • Base your expenses on zero and see what savings can be made, especially energy efficiency.

“Private commercial real estate has historically offered a strong hedge against inflation and may be more resilient than other investments in a downturn, but not all real estate investment asset classes will be able to to weather the storm.

“The savvy investors who will continue to see returns are those who have done their homework and are managing their investments well over this period,” concludes Townes.