Investec's property arm says while 2020 is clearly not a landlords' market, it will emerge on the other side of the coronavirus crisis less bruised than what might be expected of property companies thanks to its offshore operations.
Investec Property Fund (IPF) - which owns retail, office and industrial properties in South Africa, Australia, UK and greater Europe - said it had to grant retail tenants in SA rental discounts and deferment of between three and six months in some cases. The company is also anticipating that its office space tenants will downscale, taking up 30% less space than they did before when they renew their leases.
Banking on offshore operations, logistics
However, joint CEO, Darryl Mayers, said IPF's diversification to logistics and industrial property in Europe will be its saving grace. Even before Covid-19, strong offshore performance had started to show that it can support weak domestic returns.
"We expect that Covid-19 will have far-reaching implications. But on the positive note, while one doesn't want to appear as if we are immune, we will get through the other side. The properties that we got prior to Covid-19 will be there. In fact, I would argue that what we will have post-Covid-19 is a much more resilient, defensive platform in Europe," said Mayers.
IPF invested R4.3 billion in offshore assets in the year that ended in March 2020 which more than doubled the company's international exposure to 35% from 15.2% in March 2019. Because of these and other investments, 46% of IPF's portfolio is now logistics assets. Together with industrial storage facilities, logistics is seeing "a massive uptick" in demand because of Covid-19, said Mayers.
Retail business in need of care
Mayers said 88% of all IPF's tenants – 72% in SA – are "investment grade businesses". These are large listed companies, large national retailers, and major franchisees, which the company is confident will pull through the Covid-19 crisis.
In the retail space, 83% of its tenants in SA are national retailers, and small independent players only account for 17%. Even then, like other landlords, IPF must nurse those businesses which cannot pay their rent. In April and May, it respectively collected 73% and 79% of its rent bills. It entered into rent deferment agreements of between three and six months with the retailers who struggled the most.
"We've restructured leases [and] reset some of the leases to give people a fighting chance post-lockdown. But rental collection has been good across the regions," said Mayers.
In Europe and UK, the company said all negotiations with tenants have been about deferrals, and not discounts. "There's no income lost to date there," said Meyers.
Co-CEO Andrew Wooler said what the company is observing more in SA than in other markets is greater uncertainty around leasing activity, while operating costs have increased because of sanitisation of malls.
"What we see more in South Africa than we are seeing offshore, is the heightened risk of tenant failures, particularly in the retail and SME sector," he said.
But if tenants like Edcon don't survive the lockdown, Wooler said IPF will be able to release the space currently occupied by the retail group "fairly quickly" because Edcon accounts for less than 1% of the group's income.