Estienne de Klerk
Chairman, SA REIT Association
Real estate has long been a rewarding sector of the financial markets. Like all sectors, share prices and the underlying fundamentals of commercial property assets weakened in early 2020, as South Africa and the rest of the world came to grips with managing through the pandemic, with some sectors suffering more than others.
SA REITs recovered somewhat in the final months of 2020, indicating the potential start of a long-term uptrend in the real estate sector. The outlook for 2021 remains uncertain, in part because the global Covid-19 crisis is anything but over. The pace and extent of the sector’s improvement rely on the availability of vaccines and the effectiveness of vaccination programmes locally in the first instance, but also globally. REITs stand to reap significant benefit from a potential rebound in economic activity once vaccines become widely available. The result is likely to be a stronger latter-half for the sector, gaining momentum towards a more complete recovery in 2022.
Whilst the pandemic exacerbated South Africa’s underlying economic weakness, and much rests on an improvement in economic conditions, it is encouraging to witness how property owners who are key contributors across the whole South African economic value chain have demonstrated their commitment to the country, and SMMEs in particular, by providing Covid-19 related rent relief that has helped thousands of businesses stay afloat.
With 2021 now firmly underway, sanity is slowly returning to the investment markets. For now, many REIT counters remain mispriced and offer excellent value propositions for investors, while being underpinned by quality assets, driven by skilled and experienced leadership and fuelled by the proven agility and tenacity of the REIT sector and SA Inc.
The significant reduction in short term interest rates will also provide some support for further recovery in the economy as well as the SA property sector. The tailwind of lower interest rates not only reduces the cost of capital to the SA REITs but should also play a role in the rental demand dynamics for space over the medium term.
While the lockdown pushed pause on corporate activity and deal-making last year, we may see some corporate action like takeovers and mergers as this year progresses, as well as some de-listings in the sector. Balance sheet strength, regulatory compliance, quality lease covenants and strong leadership will continue to come under the spotlight for SA REITs in 2021.
The SA REIT Association and its members continue to play an active part in supporting the sector through ongoing engagements with stakeholders that have recently resulted in a number of milestones. Following lengthy and robust consultations with The Commissioner for the South African Revenue Service (SARS), a resolution was finalised on the VAT Apportionment matter, meaning that REITs may determine the extent to which VAT may be deducted as input tax on mixed expenses based on a varied turnover-based method of apportionment. Additionally, the National Appeals Committee and SARS no longer regard tenant deposits as gross income and agrees that tenant deposits can be excluded from taxable income. These are significant developments for the sector that will benefit all members during these challenging times and beyond.
We have no doubt that in 2021 the sector will reaffirm to investors, funders, regulators and other key stakeholders that SA REITs remain a well governed and attractive asset class. SA REITs remain the most accessible liquid and cost-effective way to own property which is a key pillar of every Diversified Investment Portfolio.