Commercial real estate: the landscape & rising trends for 2021

John Jack, CEO of Galetti Corporate Real Estate, says this will not be without its share of disruption. The sector has pivoted to meet the changing demands of both landlords and tenants and collaboration is at an all-time high.

As South Africa looks to rebuild the economy, investments are now ripe for the picking. "Showing signs of promise, the JSE continues to build on its momentum from 2020's fourth quarter as we see main index figures reaching levels not experienced since 2017" says Jack.

Investors bid low to reap the big rewards

"A low interest rate environment coupled with excess commercial property supply makes for a dynamic investment landscape" says Jack.

"We are seeing quite significant international interest in the commercial property sector and where the listed market may still be fairly mercurial and hard to predict, long term lease covenants offer far more certainty provided the underlying tenant is secure."

While 2020 saw many moving away from business hubs, a new trend is bringing people back to the city.

"Vacant commercial space is fuelling a surge in residential property developments. One such example is that of Atholl Yards. Previously Nampak's offices on Dennis Road, Atholl Yards is now a trendy apartment block developed by Capstone", says Jack. The properties units are smaller in nature and are used as a second property during the week while your primary residence may be out of the city allowing you to travel between when you are required to be in the office.

"Balwin Properties also made history by reaching R1 billion in sales in just forty-five days at their new development in Sandton, Wedgewood; and we are currently finalising the sale of the iconic Sun Carousel Casino which spans 583ha and presents plenty of redevelopment opportunities."

However, Jack notes that commercial property still has its place in the market. "Investors are taking note of vacant office space and are buying up properties at significantly reduced rates. Of course, the office still has its place and we do anticipate that many will head back once things start to settle. People's recollection is short-term, and we saw this toward the last quarter of 2020 already".

Areas of keen interest include Illovo, Rosebank, Sandton, Cape Town's CBD, and Midrand.

Industrial property remains a hot commodity too. "We have seen a demand for industrial real estate since mid-last year and this is set to continue. It's largely driven by the need for on-site manufacturing and a rise in e-commerce," adds Jack.

Five emerging trends

1. Restructuring of deals

With the financial year-end is fast-approaching, tenants and landlords are working together to optimise space and restructure contracts. "For instance, a tenant will request a restructured, flexible rental agreement for a portion of their lease in which they occupy 60% of their space on a long term lease and 40% on a more flexible contract with a break clause".

2. Seller financing

Seller financing (otherwise known as vendor financing) is a rising trend for 2021. "This is an unconventional financing model which meets the needs of both buyer and seller. In simple terms, a buyer - usually a corporate (current tenant) - purchases their property for an agreed amount, they then raise normal senior debt with one of the banks and pay the balance off to the seller over a two-to-three-year period. This is essentially a second bond on the property granted by the seller".

3. Investors are driving long-term leases

"Investors are paying a premium for long-term leases of more than ten years which will help to minimise the impact of negative reversions in the short-term; on the other hand, shorter leases under five years are 'oversold' with an easy 300-basis point spread between that and a ten-year lease. Historically this would have been closer to 100-basis points".

4. Small to medium businesses are more agile

Taking the cautionary approach, most large corporates will continue to work from home to avoid the risk of Covid-19 infections amongst its employees. "On the other hand, small to medium-sized companies are coming back to the office on a rotational working schedule. This is driven by a need for collaboration and reduced risk amongst smaller teams", says Jack.

5. Smaller provinces to take a hit in the short-term

"Businesses are looking to streamline their operations, and this could mean the closing of smaller branches in outlying areas", explains Jack.

"Here, we could see businesses in the likes of the manufacturing sector scaling up their production lines to produce more products in Gauteng and centralising their service base to reduce costs."

Interesting to note, Jack says that the mining sector plays a key role in driving property performance in Gauteng.  

 "We need to be realistic in 2021 and look to where the demand is. I believe that this year will be defined by new opportunities and collaborations to find mutually beneficial avenues for growth. It is critical to understand the market in detail before concluding any commercial property deal so you should always make sure you have the best information at hand" concludes Jack.