Archives for April 18, 2024

In the eye of a storm, the South African commercial real estate sector has proven to be a linchpin of our nation’s economic and societal fabric. Its pulse is the pulse of South Africa.

Our sector has been pummelled by various local pressures, many resulting from the country’s ‘own goals’, which can be frustrating and wearisome, especially when also managing through many external headwinds of high interest rates in the global markets.

As we navigate the current unpredictability of load shedding, deteriorating water supply and market fluctuations, among others, it can be difficult to maintain optimism.

However, there are signs that we can be cautiously optimistic about what lies ahead.

The consensus view is that the painful tide of rising interest rates has reached a peak and should begin ebbing from later in the year, better positioning real estate for investor confidence and attracting more capital. A fair election process is also likely to support better investor sentiment. A capital injection will fuel our sector, which is an engine for job creation and new opportunities.

Plus, the property industry is a source of good news for the troubled energy space, as we continue to make positive strides in promoting sustainable energy adoption and relieving the pressure on the national grid.

Listed property was the best-performing asset class in 2023, with the All Property Index (ALPI) returning 10.7%, outpacing government bonds at 9.7%, equities at 9% and cash at 8%. Extending this good performance record will further help restore confidence in our asset class.

However, the recent SA REIT Conference highlighted that to futureproof our sector and our investments, we must find ways to exert more influence on the external factors that pose risks to our sector, especially at the municipal level.

Property sector stakeholders and government leaders must find common ground and work together to improve our cities, towns, townships, and rural areas in South Africa. By collaborating, we can gradually arrest the decline of our municipalities and, leading on from this, bolster the return to meaningful growth in the national economy.

This joint effort is key to unlocking economic growth in the long run. It will take concerted and consistent effort, but we have an opportunity to reverse the course of one of the biggest risks to South Africa.

Our sector has proven it has the potential to enhance the quality of our collective existence in South Africa. Our dedication to transparency, straight talk, and a resilient can-do attitude drives our impact on the broader spectrum of life in South Africa.

Emira, together with our sector peers and partners, takes seriously our impacts. We are committed to fact-based solutions, learning, doing the right thing and saying it like it is. As we go forward, we are holding nothing back.

By Geoff Jennett, CEO of Emira Property Fund

In the evolving South African built environment, the debate on the future of office spaces is intensifying, particularly in light of a growing number of South African companies requiring their workforce to either return to the office or be in the office for a minimum of three days a week. This local hybrid trend echoes a global shift to a hybrid work model, spotlighting the need to adapt office spaces to these new working patterns.

Hybrid work models – blending remote and in-person collaboration – are transforming organisational strategies. As a result, this shift is altering office space demand, prompting organisations to rethink their gross leasable area (GLA) strategies. Amidst this change, the need for more engaging and flexible work environments becomes paramount.

The transition towards hybrid work models and the accompanying shift in organisational strategies has resulted in an industry-wide anticipation of reduced traditional office space requirements. However, the expected decrease in GLA is being balanced by the intention to ensure office workplace environments entice workforces to choose to be at the office. This intention can often lead to GLA requirements increasing or remaining constant.

Office planning decisions need to be carefully considered, taking into account the nature of the company’s industry and their workforce preferences. The layout of each company’s workspace will need to be reflective of their workforce preferences and output requirements to ensure improved productivity, collaboration, and office attendance.

The hybrid model necessitates the correct mix of personal space, hot desking, and communal collaborative and relaxation areas. It is often the case that individuals prefer their own personal constant environment, including desks, to attract them back to the office. Hot desking is not suitable for all job types and may not be preferred by all employees.

The integration of this refined approach to GLA into the evolving narrative of office space utilisation, highlights the industry’s capacity to adapt to the changing needs of the workforce. Additionally, the adoption of activity-based working (ABW), offering various spaces for different tasks, supports the hybrid workforce’s diverse needs, promoting a flexible and vibrant office environment. This strategy emphasises the importance of a flexible and resilient approach to office space management.

The focus on workplace flexibility now includes not only adaptable working hours but also versatile spatial configurations and operational practices. Such flexibility involves the provision of office layouts that can be reconfigured for different activities and the integration of technology that facilitates both in-office and remote collaboration. Moreover, it involves policies that balance individual and collaborative work, allowing office spaces to evolve with the changing needs of businesses and their employees.

Addressing infrastructural challenges, such as loadshedding, is essential, underscoring the need for office environments that can maintain operational continuity during power outages. For many, particularly those without adequate remote work setups, the office acts as a crucial base of operations, emphasising the need for spaces that offer both design flexibility and operational resilience.

The re-evaluation of real estate priorities has placed a renewed emphasis on health, safety, and flexibility. Properties that meet these evolving demands, offering health-oriented features and adaptable communal areas, are becoming increasingly sought after, reflecting a shift towards workspaces that support holistic well-being.

As the industry navigates the adoption of hybrid work models and addresses infrastructural challenges, the focus for office landlords is on creating environments that meet the diverse needs of tenants, ensuring the long-term sustainability and growth of office assets.

Despite initial uncertainties about the future of office spaces, optimism remains high regarding their resurgence. The anticipated growth of the office market, fuelled by strategic investment in high-quality properties, points to a positive trajectory for the sector. Strategic asset management plays a pivotal role in this context, where the refurbishment of existing properties in strong nodes is essential to retain and improve the value of the current portfolio.

As the property sector faces significant changes, driven by hybrid work models and evolving market dynamics, the emphasis on quality, adaptability, and tenant well-being grows stronger. Redefine is committed to innovation and collaboration. We are actively engaging with the changing needs of our tenants to ensure our office environments enhance productivity and well-being. Our goal is to create sustainable workspaces that meet the future of work’s demands. We encourage all stakeholders and tenants to join us in shaping work environments that set new industry standards.

Written by Scott Thorburn, National Asset Manager for Offices at Redefine

SA’s retail sector, in particular, was severely affected by the COVID-19 pandemic. At the time, it was widely believed that the retail industry would face a difficult recovery. However, the sector has shown remarkable resilience, with turnover now surpassing pre-COVID levels.

Although e-commerce has grown tremendously as a result of COVID-19, South Africans have returned to shopping centres over the last three years. This has led to a rise in foot traffic, a decrease in vacant spaces, and an increase in retailer turnover at malls around the nation.

This is evidenced by Redefine’s FY23 results, which show continued improvement in operating metrics across the JSE-listed Reit’s SA retail portfolio, which makes up 25.4% of Redefine’s R59.9 billion local asset platform.

Redefine reported strong letting activity and high tenant retention (92.1%) in FY23, with active occupancies of 93.6% at FY23, and an improvement of negative rental reversions from -8.6% in FY22 to -4.1% in FY23.

Nashil Chotoki, Redefine’s National asset manager for retail, notes that foot traffic has increased in larger-format retail centres as customers return to these centres for the convenience they provide: a one-stop shopping experience.

Redefine’s 2023 festive trading update states that during November and December 2023, foot traffic at large-format malls surpassed that of smaller convenience stores, with a 6.3% increase in foot traffic when compared to the same period the previous year. Overall, foot traffic across Redefine’s retail portfolio during this period exceeded pre-COVID levels.

According to Chotoki, “South Africans still value in-person shopping, especially at one-stop centres that offer access to everything in one location. Due to the inflationary environment, consumers’ disposable income is still under pressure, which has led to a significant focus on essential pharmacy, supermarket, and value fashion retailers for spending.”

Redefine’s festive trading update is reflective of this trend, with grocery stores, supermarkets, and value apparel driving mall turnover growth. Malls within Redefine’s retail portfolio that posted strong festive season trading updates credit this outcome to revamps and openings of grocery stores and supermarkets such as Checkers, Food Lover’s, and Spar.

Redefine added 1 400sqm of essential services, whose festive trade increased turnover by R101 million (5.4%), to malls across its portfolio throughout the year.

As the essential services category is seeing the most growth, Redefine collaborates with retailers to increase exposure to essential services and value-focused brands – these occupy 37% of gross lettable area and are forecast to improve to 40% in the short term.

Looking ahead, Chotoki predicts the retail sector will continue to grow as interest rates in the country start to decline and consumers have more disposable income.

“Retailers who provide good value will continue to do well,” he says. “Interest rates may start to decline, but purchasing habits won’t instantly shift. Customers may continue to be frugal with their spending, because some habits have become ingrained.”

“At the same time, as consumers’ disposable income rises, shopping centres with compelling entertainment offerings will likely draw more customers than others,” he says, adding that malls will have to consider ways of enriching their shopping experiences in the coming months to remain competitive and grow.

“It’s imperative that shopping centres concentrate on meeting the needs of both current and potential customers. We have invested heavily in research methods and customer feedback to obtain a thorough grasp of shopping preferences. We then use these insights to inform tenant mix decisions and work with retailers to improve or modify their offerings.”

The way the centre engages with and contributes to the community in which it functions is another important success factor. He says it’s critical that the community understands how the centre might be enhancing the neighbourhood, for instance, by generating jobs or enhancing the local infrastructure.

“The future of retail is likely to be differentiated by the unique features and location of each property. Properties that are well-located and have strong tenant covenants, positive relationships with the community, and a clear sense of their own value proposition are more likely to succeed,” he says.
According to Chotoki, there is a significant opportunity for the growth of retail in the country, because the rural and township areas are still undersupplied. However, developers must be extremely aware of the location of their businesses in terms of transportation routes and taxi services.

As part of Redefine’s strategy, the business is increasing exposure to rural or so-called township assets, which Chotoki says is the fastest-growing and most resilient retail shopping centre category in the country currently.

Chotoki says the recent acquisitions in and expansion of Redefine’s retail real estate portfolio demonstrate the company’s commitment to the retail sector, which continues to drive value for its business, stakeholders, and wider communities in the country.