The commercial property sector has delivered “robust returns” to institutional investors over the past 15 years, with “phenomenal” capital growth being realised, says Darryl Mayers, co-chief executive of the Investec Property Fund.
This has been achieved on the back of strong asset appreciation and rental increases that have kept pace with inflation. By leveraging time and inflation, this asset class has outperformed just about everything else in the local market over this period, says his co-chief executive Andrew Wooler.
Developers and investors exploited this bull market to rapidly scale their portfolios, which led to significant residential and commercial development around South Africa’s major cities.
Among institutional grade commercial properties, Wooler says retail was a stand out performer for fund managers and investors. However, the fundamentals that fuelled this boom period have dissipated and the dynamic shifted.
“Due to a weak macro-economic climate characterised by low growth and instability, no new businesses are entering the market, which means a lack of new tenants.”
Wooler says the rampant development in key business nodes has resulted in an over-supply of office and retail space, with a contraction in consumer spending due to a greater tax burden, below-inflation salary increases and above-inflation rises in municipal services and electricity dampening rental renewals in the retail sector.
In this soft market, Mayers says where rental demand is low and long-term leases are hard to secure, institutional property investors are “understandably” looking to emerging trends to manage current risks and realise future returns.
“Fund managers and investors with a robust and resilient portfolio that includes favourably positioned commercial office and industrial properties will be able to respond to a host of new emerging trends.”
For example, he says shifting workplace dynamics influenced by a greater focus on worker health, productivity and satisfaction is driving demand for locations with access to major transport routes and properties that provide suitable working spaces to support remote workforces.
“Employees don’t want to waste time in traffic, which is influencing the rising demand for decentralised workspaces. Similarly, proximity to commuter nodes has helped to maintain rental demand within surrounding properties.”
Referring to the exponential growth of global co-working and outsourced office space providers, Mayers says this trend has already taken root in South Africa.
“Co-working facilities appeal to an emerging generation of workers who value freedom and flexibility, as well as a growing number of cost-conscious businesses that prefer the on-demand office space model.”
Wooler says an over-supply of space has also prompted a normalisation of rents in certain areas, which is driving office migration away from decentralised offices and back into central business districts.
“For example, some businesses are now paying comparable rentals for A-grade Sandton offices to those charged for B-grade spaces in outlying areas such as Sunninghill, Rivonia, Bryanston and Fourways. And with easier access,. the issue of parking space in CBDs has also become less of a headache.” Inner-city gentrification is another global trend to keep an eye on, Mayer says.
“Property owners who collaborate to upgrade a precinct and cater to contained environments where people can live, work, shop and socialise, all within walking distance, will create a compelling offering that will resonate with younger generations.”
Wooler says: “All these factors should prompt property fund managers and institutional investors to consider how the future workplace dynamic will affect their investments.”