SA Reit Association chair sees some positive shoots
The SA Reit Association, that promotes the ownership of property through the buying of shares in Real Estate Investment Trusts (Reits), is celebrating its 10th year.
Business Day spoke to Estienne De Klerk, CEO of Growthpoint in his capacity of SA Reit chair.
A Reit is a company that makes money from the ownership, trading, and development of real estate assets such as shopping malls and office blocks. In SA, a Reit receives special income tax deductions and offers investors exposure to property ownership and rental incomes through shares listed on the JSE.
To qualify as a Reit in SA, the company must pay 75% of its earnings to shareholders, in the form of dividends.
Why invest in property after everything that has gone wrong?
It ’ s been a very difficult environment for property over the past few years because we have experienced a bad economy and Covid-19, where the real estate industry and the hospitality sectors were, arguably, the most affected. Coupled with this were the riots, the KwaZulu-Natal floods and electricity outages. To rub salt into the wounds, interest rates have gone up in a very short period by 475 basis points.. All those things have resulted in property stocks performing pretty poorly.
However, now, it’s as if the cycle has bottomed out. It’s slowly turning from an investment perspective. Investors are always trying to pick the bottom [when they think shares will stop falling and start rising again]. I think many investors will include real estate in their portfolios now because we’re starting to see some positive shoots. Tenant vacancies are starting to drop down in all three sectors, even in the office space.
Offices record the highest vacancy rates in the sector, above those of retail and industrial properties? Is the office space really improving?
Vacancies in offices in Cape Town and Durban have dropped quite substantially.
What ’ s driving demand is companies needing more office space after previously giving it up. There are a lot of smaller tenants coming back into the market. Even load-shedding has been positive for the office market, because it doesn’t make sense for an employee to stay home and use a generator.
The last thing we have seen is quite a lot of business process outsourcing (BPOs/call centres) needing space.
Why are call centres opening new operations or expanding in Johannesburg when they are typically located in Cape Town and Durban?
BPOs are prevalent in the coastal markets but some are opening up extra space or new facilities in Gauteng. The availability of space is a challenge in both Umhlanga Ridge and Cape Town. With the surplus supply of space available in Sandton, it’s attractive to bring their [call centre] businesses here. For example, Investec’s centre for all global customers is in Sandton.
Call centres are popular in SA. For a start, the rental and staff are cheaper here [than in developed countries] and labour is readily available. We are wellsituated in terms of the time zones on a global scale. We can service everything from Australia to the US. And our English accent is quite understandable.
SA Reit promotes investing in Reits. Can you explain the benefits?
A Reit is the most liquid, tradable and cheapest way to get exposure to real estate. You get exposure to the best quality real estate available in the country. A normal investor, with R1,000, would never be able to invest in kinds of properties owned by Reits.
The investor is getting the professional management of property and the cost of capital that property companies can access is much lower than what you would be able to as an individual. Cheaper capital (lower interest rates) means the returns of a listed property counter normally exceed that of a portfolio of direct property holdings.
The SA Reit Association is celebrating its 10th anniversary? What have you achieved as an industry body?
In the past decade we have reached significant milestones. We finalised the tax dispensation for the industry.
(Reits do not pay tax on the 75% of the income that is distributed to investors.)
The second thing is that there has been a marked improvement in disclosure within the sector. As the association, we provided recommendations on how firms should report their financial numbers and performance indicators. That has helped analysts and the investor community quite a bit.
The association also assisted our members, and the property industry, for that matter, in dealing with Covid-19 [lockdowns] and avoiding protracted legal battles with various retailers. The retail industry and property industry collaborated to agree on rental relief.
I am sure SA Reit is hoping interest rates will drop soon?
It is clearly in our interest for this to happen. It will relieve pressure on tenants, as well as on the broader economy, which means we should see an improvement in economic activity. If interest rates come down, so will our cost of debt, which will benefit all investors. reduce, we’ll pay less for our debt. So it means the cost of capital will reduce and that benefits all investors.
I’m not an economist, but I think the expected interest rates cuts are going to come a bit later than the market expects, given the conservative nature of most central banks.
IT ’ S AS IF THE CYCLE HAS BOTTOMED OUT. IT ’ S SLOWLY TURNING FROM AN INVESTMENT PERSPECTIVE
TENANT VACANCIES ARE STARTING TO DROP DOWN IN ALL THREE SECTORS, EVEN IN THE OFFICE SPACE