South Africa’s largest property owners are increasingly reducing their exposure to Gauteng and focusing on the Western Cape. This reflects the entrenched trend of ‘semigration’ where those who can afford it have gradually moved to Cape Town or the Garden Route from other parts of the country.
Following riots and flooding in KwaZulu-Natal in recent years, sentiment in the residential property market in this region has fallen with 14% of sales due to relocation within the country (mainly in Cape Town), that’s nearly double the pre-Covid rate.
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One of the country’s largest landlords, Growthpoint, said already last year that its portfolio optimization is “designed to reduce our exposure to cities and provinces with less favorable commercial and real estate dynamics by reducing our portfolio of Gauteng and investing more in the West”. Cape Town and KwaZulu-Natal (KZN), where total property returns have been better.”
There remain well-founded concerns about eThekwini, where much of the municipal infrastructure is on the verge of collapse.
Specifically, Growthpoint says its strategy is to expand its “Western Cape office portfolio into growth nodes.”
Currently, about a quarter of its office portfolio is in this province. In last month’s results presentation for the first half of FY23, the group said it will “reduce office exposure in underperforming Gauteng nodes and increase exposure in the Western Cape.”
Generally speaking, vacancy in the coastal regions is lower than in Gauteng (this is true not only of the office sector, but also of industrial assets). For Growthpoint, its offices are 11.9% vacant in the Western Cape, 5% in KZN (it only has offices in Umhlanga) and 27% in Sandton.
Redefine, which holds just 16% of its total portfolio in the Western Cape, said it would prioritize refurbishing its P-grade and A-grade assets. Its ‘Cape Town portfolio will be the immediate focus’ .
Jones Lang LaSalle’s recent South African property investment review and outlook for 2022/23 indicates that the Western Cape has seen a 66% increase in direct investment in 2022 – bringing its share of total investment into the country to nearly a quarter (23%) of 11% in 2021. Gauteng’s share has fallen from 68% to 52%.
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FNB Commercial Property Finance strategist John Loos said that in the current “weak economic and rental market environment, rates and prices are really starting to matter a lot more to landlords and tenants, and it it is not only about the level of rates and tariffs, but also about the quality of municipal services and the public services received in return”.
“Such changes in business activity will intensify geographically in the near future, as many businesses are increasingly financially constrained in a stagnant economy, and with many councils implementing inflation rates. and higher tariff increases as services and infrastructure deteriorate”.
Loos notes that some listed real estate funds “indicate a region that seems to stand out from others in this respect.”
“These landlords seem to be much more excited about the deal they are getting in the Western Cape, an area that seems to be increasingly outperforming others in terms of service delivery, infrastructure, retention and attraction of people. household and business investment, and economic and real estate. market performance.”
“[The Western Cape] The region has for years attracted large net inflows of skilled and higher-income ‘migrants’, as well as some business ’emigration’,” adds Loos.
Even residential property developer Balwin echoes this market development, saying last month that “regional trends continue to favor coastal areas, particularly the Western Cape, where demand remains resilient.”
It’s not just the provision of services and the functioning of municipalities that are at issue (although ask Liberty Two Degrees, which has had to dispute its tariff bills in recent years for its two largest assets!).
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Increasingly, Cape Town’s ability to somewhat offset load shedding, as well as a plausible plan for procuring additional electricity, is a major consideration.
Spear Reit CEO Quintin Rossi told Moneyweb earlier this year of one thing that’s “very attractive” about the Western Cape when it comes to Cape Town’s city network “there’s a general commitment of the city”.
“We enter into reduction agreements on our large industrial assets, and then all of our tenants on these complexes agree to reduce their load, which then means that they do not benefit from load shedding, which creates business continuity,” said Rossi.
“I think now more than ever, properties in Cape Town’s supply actually have the competitive advantage of being able to keep the lights on for longer, which means that when people are looking for real estate solutions – and i’m speaking provincially now – they would be inclined to look at the city of Cape Town… If you weigh the loss of productivity, the cost of extra labor, plus the cost of your diesel when you’re on a supply Eskom vs a Cape Town City supply, even though the Cape Town kilowatt hour charge is slightly higher, the business continuity is there.”
Spear Reit itself spotted this trend long before other JSE funds. It was listed on the stock exchange in 2016 with the aim of investing in property across the three main sectors, while maintaining “a strict Western Cape focus with a Cape Town bias”.
He said this was “due to favorable economic and real estate fundamentals in the Western Cape and management’s belief that proximity to assets allows their management team to extract maximum value from their properties from a asset management, property management and general supervision”.
Migration is good for business. It said in its pre-closing update in February that its investment universe is expanding with “many new growth nodes being established in the Western Cape as out-migration drives development growth”.
This article originally appeared on Moneyweb and has been republished with permission.
Read the original article here.
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