The full impact of the coronavirus lockdown on industrial property users in South Africa will only become evident long after restrictions have been lifted, predicts Errol Taylor, head of asset management: industrial, at SA real estate investment company Growthpoint Properties.
He expects that the direct, immediate effects will be exacerbated by the downgrade of SA’s credit rating and the fact that the industrial sector, to a significant extent, relies on other international markets.
Furthermore, he notes, not all countries will be open for business when SA’s lockdown ends.
Like almost all other sectors, industrial property has been impacted by the lockdown. Businesses that are not deemed essential have slowed or closed down, affecting the use of industrial space.
“Non-essential producers and distributors are either operating at very reduced administrative levels or not at all, while still having to meet their financial obligations,” Taylor explains.
While some businesses are less affected or even thriving – manufacturers and transporters of essential goods, the distribution centres of both online and brick-and-mortar retailers selling essential products, and those manufacturing or distributing agricultural equipment and materials, for example – Taylor this will not necessarily be enough of a buffer.
“Realistically, we can expect that in the coming months, small and large businesses in the [industrial property] sector will face massive challenges. This could add to the country’s already heavy unemployment burden and increase the strain on the property sector,” warns Taylor.
“The SA industrial market is resilient, and South Africans have proved immensely capable of adapting to change. Still, even with this on our side, there is no doubt that it will take a fair amount of time for industry and the industrial property sector to recover from these unprecedented circumstances.”
Just how tough can it get?
Tony Bales of Epping Property specialises in this industrial node of Cape Town.
“Certain businesses will not survive. Most businesses will feel a large amount of disruption and financial pain. Jobs will be lost. Industrial landlords will collect less rental income. Short-term, industrial property vacancies will increase and industrial rentals will fall,” he predicts.
“Industrial businesses, industrial landlords and the banks will all need to find short-term solutions that can be accommodated by all parties, as all parties need to survive and co-exist in the longer-term,” he says.
But there is the expectation of some resilience.
The industrial property market in SA – especially warehousing – does have an advantageous position in some respects, as there were fewer vacancies to begin with when the recession started, according to property economist Erwin Rode of Rode and Associates.
This is because this segment of the market sees few speculative developments.
Rode expects most casualties will be tenants in the smaller industrial premises, with smaller industrial enterprises more exposed to the recession.
John Jack, CEO of Galetti Corporate Real Estate, says logistics is in demand due to a lot of retail now moving online. Covid-19 may accelerate the use of automation and robots in operations and reduce the sector’s reliance on labour.
The move to online shopping, especially for groceries, could become more permanent and, in turn, boost demand for logistics space.
The latest Epping Industrial Property Index for first quarter of 2020 shows that, while the larger food-related and pharmaceutical businesses have generally continued to maintain a form of financial continuity, the vast majority of industrial enterprises have not been as lucky.
Many industrial businesses in Epping felt the pinch as far back as January, when the supply of goods from China significantly dried up due to the impact of the coronavirus pandemic there at that time.
Furthermore, Bales says in South Africa, many processes are labour intensive. Many industrial companies in lockdown have a very high labour-to-sales ratio, translating to labour being a very significant monthly cost item.
According to Quintin Rossi, CEO of Spear Reit, says now more than ever, industrial landlords need to remain close to their tenants, engage in mutually beneficial renewal discussions and “be a bridge over troubled waters”.
“The latter being said, tenants similarly need to appreciate that landlords don’t sit on a pile of cash that can top up whenever and wherever. All deals need to be fair and equitable for both parties, with both parties focusing on overcoming the crisis and remaining in business together for the long term,” he suggests.
Ben Shaw, CEO of digital rental platform HouseME, says Covid-19 poses difficult questions for landlords and tenants in SA who are uncertain about their rental rights and what is expected of them during this time.
He anticipates that after the pandemic is over, the market will be under pressure for longer than anticipated.
“Far from a pricing recovery this year, we will see pressure continue across all rental areas due to general degradation in credit profiles. This could force landlords to accept less-risky lower priced rentals, which will pull the market down in terms of yield,” he says.