News Research

Green shoots of growing investor appetite emerging in SA’s commercial property sector

South Africa’s property market struggled through the pandemic, with virtually all real estate sectors registering a decline in performance, according to a new report published by JLL, South African Real Estate Investment Review and Outlook 2021/22, which reviews local commercial property investment activity.

The report’s primary sources of information include publicly available databases, resources, and interviews with industry stakeholders, and it is focused on deal flow registered in the 2021 calendar year, comparing investment volumes last year to deal flow over the past four years.

Deal flow value across the office and industrial sectors declined compared to 2020, with reprieve in 2021 attributed to the retail and alternative and living property sectors. Student accommodation and filling stations emerged as a growing asset class in 2021, and demand remained rife for prime logistics and retail assets”, notes Mieke Purnell, Research Manager at JLL.

Investment in office assets has continued to decline since 2018 as the local economy weakened and the sector battled an oversupply scenario. Despite the major drop-off that occurred in 2020, the office sector remained under pressure throughout 2021 as several of the adverse drivers from the previous year remained prevalent. The investment appeal of this sector was especially limited by weakened rentals, high vacancy rates, and a slump in demand during the pandemic, with limited scope for improvement. This sector’s aggregate investment value reached roughly R2.6 billion in 2021, down by 18% from the R3.1 billion reported in 2020.

Major office deals in 2021 were generally sale and lease-back transactions linked to large corporates, such as the Telesure campus transaction in Dainfern, or associated with redevelopment and refurbishment, such as the disposal and acquisition of 1 Thibault Square. According to Pepler Sandri, Director: Capital Markets, JLL, average sales rate data reflects a bifurcation in the market, with prime stock achieving relatively favourable rates. In contrast, lower grade stock in weaker nodes realised significantly lower prices, particularly in comparison to replacement cost.

Like other sectors, the retail property sector suffered under the initial lockdown restrictions but proved resilient in 2021. The staggered nature of lease expiry profiles at shopping centres, together with negative rental reversions, lower escalation rates, and shorter lease terms (none of which were unique to the retail sector), continue to hamper the sector’s performance. The aggregate transactional value within the retail sector rose by +17.6% in 2021, effectively exceeding values reported over the historical five-year period. Transaction counts declined but the aggregate lettable area transacted also improved through 2021. Retail transactions are estimated to account for around 34% of total deal flow activity, remaining level in terms of investment values reported for 2020, according to Sandri, who continues that income performance of retail property is on the rise as vacancies are filled and landlords seek alternative revenue streams through the installation of signage or solar PV systems, for example.

Regardless of the headwinds faced, investment in the retail sector showed strong growth in 2021, increasing by 18% to peak at just over R7 billion.

The retail sector saw several landmark deals during 2021, including the finalisation of the sale of Atterbury Value Mart for over R1 billion and the Nicolway Shopping Centre transaction at a record yield breaching R1 billion. Looking ahead, JLL is involved in (and aware of) several significant shopping centre transactions currently under negotiation, although it remains to be seen whether investment in 2022 will reach R7 billion or higher.

Following the outlier transaction volume experienced by the industrial property sector in 2020, investment volumes dropped significantly in 2021. When comparing investment in 2021 to pre-Covid-19, it is evident that demand fundamentals remain strong. As a case in point, JLL, advised on the recent sale of the 145 000m2 DSV Campus in Plumbago that transacted for R2.05 billion in 2021, accounting for almost half of all deal flow within the sector for the year. Further investment into industrial property is presently limited by the lack of core stock available, rather than a lack of demand.

The alternatives and living sectors recorded a record year. This sector was dominated by student accommodation, senior housing, and mid-market rental accommodation. Data centres were added to the pool of non-traditional property investment in 2020 and in 2021, filing stations emerged with strong investment volume. The outstanding performance of this sector is primarily the result of two of the largest student accommodation portfolios changing hands, and unless a similar extraordinary deal is finalised this year, investment volume is likely to reach the record R6.6 billion achieved last year.

Of all the property sectors, hotels and hospitality properties possibly bore the heaviest brunt of the pandemic. Harsh operating conditions resulting in lower capital values created an opportunity for investors with a longer-term outlook to purchase hotels at well below replacement cost. Additionally, the pandemic-induced slump in hotel development activity (as well as offices and retail centres) should help with recovery as the stock situation is rectified. Investment into the hospitality sector in 2021 was not only limited to direct property sales, but rather included the restructuring of operational and letting agreements as well. A significant hotel sale recorded in 2021 is the Zimbali Resort in KwaZulu-Natal. 

Despite the adverse effects occasioned by Covid-19, investment activity is supported by debt capital becoming more affordable than ever through the lowering of lending rates. Along with discounted asset prices, this has led to an ideal investment climate for investors who predict a medium to long term recovery”, added Purnell. 

The report concludes that annual economic growth trends are forecast to stabilise (drop) to pre-pandemic levels as extraordinary stimulus winds down. Interest rates locally and globally are increasing; however, the expectation remains that lending rates will linger below levels seen before the global financial crisis. 

Looking forward, Sandri suggests that “the green shoots of growing investor appetite are emerging, and 2022 is set to be a strong year from a commercial property investment sales perspective, with several preeminent deals already underway.”