Looking ahead at South African commercial property trends for 2022
Category Editorial
We have managed to put another challenging year behind us, and while there is no obvious end in sight for the Covid pandemic, we look forward to the year ahead with some measured optimism.
Additionally, we have lost some world icons this last year, and in particular we pause to think of Archbishop Tutu. We collectively mourn his loss. He will be missed. If ever there was an optimist who looked for the good, he was such an individual. And so, from his inspiration, we take that optimism and willingness to face a challenge to heart. Equally from people like Sidney Poitier - who broke down boundaries and set new levels of excellence - we find inspiration, and we remember them in their passing.
So, with such inspiration in mind, we face the year ahead. We are under no illusions that it will still be an uphill climb, but we know that there are silver linings to be found as we South Africans adapt with our usual stoicism and sense of humour and as we all start to live with the virus and resume a sense of normalcy wherever possible. We take encouragement from signs of green shoots coming through. Vaccination rates are climbing. Ability to trade and endure the varying strains of virus appears to be improving. More specifically, property acquisitions are occurring, letting is happening, and new business ventures are showing through. But what we are seeing is that new players are entering the market, flexible models are being catered for, and additional service offerings are being laid out. The opportunity is there, we simply have to look.
In our property industry, there are of course remaining discussions around rent rebates for struggling tenants, but these are less in number, and a sense of normalcy is returning. But to aid tenants to continue forward it still requires a hands-on approach. To this end, Spire has been working tirelessly with numerous landlords to be creative about how we deal with this shift in the market, through both reviewing their position, and working in collaboration with their tenants to mitigate any negative impacts. There is no cookie cutter solution here. Each business and property is different, as are the needs of the owner and tenant in each case. So open and honest discussions are required.
Given economic pressures tenant and landlords alike face, litigation is unfortunately on the rise, as increasing numbers of tenants default on payments. This does mean that formal legal conversations are now more the norm, rather than informal ad hoc variation discussions (which we tend to see more of in easier economic times). The lease becomes more important, and more rigidly applied, as the back stop to be able to tackle the difficult topics of rights and responsibilities. A good advisor here is becoming ever more important. It is a role we at Spire take very seriously. Even in such formal (often litigious) discussions, often win-win outcomes can still be found. These require some patience, transparency and ability to compromise, but equally to know where the final line of no return rests.
Defaulting tenants, unfortunately, also have a negative impact on the value of commercial property. This is a topic not often fully understood in the arena of default and why it is so important to move quickly to resolution on areas of dispute.
When a surveyor is valuing the property, amongst other factors, they analyse the quality of the tenant and the length of the lease, as this provides an indication for future uses of the property, as well as the overall valuation. This valuation is often critical as it links to the owners' finance obligations in terms of loan repayments back to the bank, and can have serious financial implications if not adhered to.
This means that property owners must make some hard choices, sometimes involving even saying goodbye to long term tenants when sustainability is no longer possible, for the sake of longevity of the building and to be able to continue to finance it. The challenge is to be able to walk a journey to understand this thoroughly, quickly, and also understanding the parameters both parties have to move in. Equally, being able to restructure to retain good business tenants is critical. Vacancies after all are costly both in terms of income loss and cost of reinstatement and replacement.
An interesting development due to Covid is that there has been a surge in progressive lateral thinking regarding alternative uses for property - such as conversions into residential or shared workspaces. Whilst many commercial property holders have a diversified portfolio anyway, some may take this as an opportunity to develop their existing holdings into residential property, given that this market is expanding. Because shared workspaces offer short-term leases and less fit out costs, they are great for tenants that want to be flexible and expand/contract as needed in line with their business plan, to allow for hybrid models and manage staff work from home expectations. But every option has its cost. Desk costs in these flexible options tend to be more expensive over the longer term, so each business has a trade-off to consider. For some tenants the need for separate corporate identity sits at odds with a shared model. Equally, a growing development has been the elevated status of 'wellness' features in commercial space. Users are increasingly prioritising such aspects. So again on all these fronts, a full discussion is needed, and an advisor often becomes very important in navigating such rocky waters.
Other rental options showing greater presence also include allowing for percentage of turnover type leases. This allows a tenant to pay as it earns. Historically more the bastion of the bigger retail nationals, we have seen this mechanism start to become more mainstay with smaller tenants.
However, with the need for constant cash flows, and the uncertainty created by COVID we are also seeing owner's being more restrained in such discussions. A lower, more certain, base is arguably seen as more preferrable to an unknown possible upside, or downside. These debates require a broad understanding of property trends and pitfalls and should not be seen as a simple patch solution, lest they unravel quickly and undermine overall finance obligations. As a result, we have seen greater requests coming to our corporate services division to guide clients to an optimal, value enhancing outcome.
So, what is likely to happen next?
The economic downturn over the past 18 months has certainly affected some sectors more than others, including the hospitality and retail industries. The recovery here remains muted in our view. The short-term future for some commercial property tenants and landlords may remain challenging as they still need to repay their rent deferrals and bank loans.
It is likely that both tenants and landlords will face a continuation of uncertainty in the property industry, but we should see some normalising trends. Office space will slowly come back, but on a smaller footprint basis. Residential conversions will increase, logistics will continue to grow and convenience shopping with more open-air facilities will be 'top of the pops' for retail. Rebate discussions are going to continue, but the ability to offer further rebates by landlords is now largely drained. Litigation will remain higher as harder calls are needed. Insurance costs are likely to increase with the risk inherent in the market, so legalities in the lease will become more top of mind once more.
If you are a tenant or a commercial property landlord, and require any support regarding anything discussed above, then please contact us at Spire Property Solutions for assistance and advice. It is important that we all remember that we will get through this time, we will endure, adapt, learn and carry on towards success.
As Henry Ford said: Unless you have courage that keeps you going, no matter what happens, there is no certainty of success. It is really an endurance race.
To finish off I hope everyone managed a restful and safe festive season with loved ones. With our batteries charged, I wish everyone a fantastic new year ahead. May it abound with opportunity.
Regards,
Gregg
Author: Gregg Huntingford
