 This is episode 19 of the podcast and we're of course on day 42 of the national lockdown. Now as many of us have seen that COVID-19 has had an effect not just on residential properties, especially if you're a tenant or a landlord perhaps you've already made arrangements with your tenants or if you're a tenant you've already started speaking with your landlord. This has also had an effect on the commercial property sector. And tonight we're looking at the impact of COVID-19 on the commercial property sector and some of the opportunities and threats that this global pandemic has caused in the sector and helping us to understand and unpack what some of the effects have been and perhaps even what some of the opportunities are. I'm joined by a student who's the spokesperson for the property industry group. He's also chairman of the SA reach association and will speak a little bit about what reads on some of the opportunities in the read space as well as the CEO of growth point South Africa. Thank you so much for joining us this evening. Thanks for having me. So I think let's first just start with you know some of the and I was saying to you before we went on that this has probably been such a difficult time for different commercial landlords. As they find probably some of the tenants either struggling to make rental payments, and of course having to deal with some of the effects of the COVID-19 in South Africa and commercial tenants potentially not being able to make some of the rental. I know that this week as an as a group that has different stakeholders from your support and other players you've gotten together and essentially have a guideline on some of the relief and even extended some of the relief to some of the different players could just take us through what some of those have been that have been provided at making things slightly easier for some of the tenants and also ensuring that of course the landlords are also financially covered as much as possible and can weather the storm that this pandemic is essentially far understand. So, in the beginning of the middle of March, we effectively what was a simple little WhatsApp group of a couple of landlords effectively blossomed into the representative kind of body for commercial real estate in South Africa. And what we did was we effectively got support, which are the property owners association, as well as the shopping center Council of South Africa, and the essay read association, which is the representative association for all the listed property companies together, as well as a whole bunch of private private property owners. So really is the owners representative body. And the idea was to initially was just to deal with, let's say some of the challenges the practical challenges that we were facing as shopping center owners as example, how to provide security how to provide hygiene services, how to, you know, manage some of the challenges, the operational challenges that that we would have faced. I mean, at that stage, nobody contemplated any lockdown. And that came actually very briefly within a week of actually getting together. The lockdown really came in and at that point we were working closely with government to try and expand, or at least try and assist customers being the shoppers ultimately to try and get the right list of essential services or as border list if you'd like. Of essential services in the lockdown period. So the reality is is that what ensued after that was pretty messy for the real estate industry. And, you know, there is this perception that landlords are these big ogres that have copious amounts of money, and they don't they're not really seen as businesses really to be honest. And that in fact isn't quite the case. So when you think about landlords, the South African property industry is probably one of the largest most proliferated industries in the country with players literally one man bands with one property right up to very, very large companies like a growth point which is assets in excess of 160 billion So you do have a very wide church of different owners. And the reality is is that each one of them have sort of different dynamics and different problems that we have to deal with but ultimately what happened was that most of the retail tenants decided they weren't going to pay their rent, whether they could or not. That wasn't really the case but most what the sort of antidote or level of collections were for April was around about 30 to 40% of rentals were collected now to give you idea. You're cost to your cost to income ratio before you even service debt, or any other administrative costs is in excess of 40%. So the reality is from day one, you know, many of the landlords were in a deficit they were funding on on the on the one side they busy funding the retailers that are their clients, they busy funding their rates and taxes their water and lights, etc. And the real estate industries costs are pretty fixed so you think the biggest costs for us as an industry is our rates and taxes that we have to pay on behalf of we collected from our tenants but then pay it to the municipalities. We also have the water and lights and all those costs of up and you know of operating costs. This debt and we've got people to employ we one of the biggest direct and indirect employers in the country in that clearly all the services industries like security and gaming. They all work for our industry. And so all these costs are pretty sticky and obviously now you don't have income. So liquidity is a very big thing for all the landlords at the moment, and we are basically muddling through what is quite unprecedented sort of scenarios which has been nearly forced on to the South African economy so it is quite unique to close down economy. And I think that maybe the reality is maybe government has underestimated how fragile that economy is. We've seen both our airlines going to business rescue and and I'll tell you what I know of a couple of other companies so we've had Edcon which is a big retailer they've also gone into into business rescue already and I think there will be other retailers that are shortly on their heels and other companies so it's not just the retail industry is not just the the the commercial property industry but various other industries in our country so we very concerned about the impact that it is having on our economy. The reality is we've dealt with, we came together and decided look as a industry we can watch our tenants suffer, or we can proactively come together and see whether we can convince pretty much most of the players in the sector to to provide some relief to our clients and big focus on SMMEs and protecting jobs. So what we did there was we brought into life something called the assistance and relief package or guideline and how these guidelines work is effectively the relief is offered to tenants in two forms. One is actual discounts so in other words, if you owed a hundred grand for rental for the month, you know, the small SMME might be given off the whole hundred grand, never to be recovered by the landlord. The other form of relief and I saw that that you know you've essentially broken it down to that 100% discount. Certainly for I think it was for April and then for May it was a perhaps you know 50% discount if they think that the landlord can afford more than they can extend more and I think you're looking essentially at a two to three month period. So we've actually extended it now to three months in so April May and June. And the reason is I think realistically we don't expect you know everything to be back to normal the day lockdown stops and as we've seen practically with level four and all these different levels, which creates quite a lot of uncertainty to be honest, you know, things will take a little while to become to come back to normal. But in terms of the liquidity that that is offered back into the industry into the retailers I mean that if you take it across all the landlords must be valued at over three to four billion Rand worth of either debt relief or or you know moving rental payments later so I'm actually acting like like a banking facility to those to those those different retailers and and the landlords also could agree to do that interest free, which is I mean we do incur interest so the fact is is we are actually funding the retailers in this process. And what we have done is it's not just the smallest retailers but we've taken this all the way through to even the largest retailer so we busy negotiating with the big clothing retailers some of the other big retailers in the malls. Clearly, you know this is a process it's it's a big job. If you've got lots and lots of tenants to get through this whole lot, but the idea was to offer them real relief in this very difficult time over the three month period now. The reality is is a good deal is probably where everybody is either equally happy or equally unhappy. And if you if you're not trading as a retailer, you know, I think any payments, whether it is to your suppliers or to your landlords, which is also really a supplier of yours is is a difficult thing to get across because you're looking at your own liquidity in this time. But what we have kind of managed to do I think there is some sharing of the pain concept that that is kind of finding favour with both parties and you know we've just been on the front foot as a real estate industry to to actively publish what we prepare to do and how much money we actually can afford to put on the table. And I think that must be the only industry in the country I can honestly tell you. I don't know of any other industry that's actually really, right, which is another bizarre and unprecedented thing, but the sort of ethos of Ubuntu that that the industry's bringing to the market. And I've actually been surprised at the level of goodwill coming out of the industry, you know, because when government asked for testing sites for instance for testing testing sites. I think the list at the moment is over 350 different sites offered for free to government, you know, where they can run testing sites. And the reality is, is I think from the industry's perspective, it's not like we have infinite capital to be able to do it. We've also got businesses to run. Many of the guys have have debt against these investments, and, and they've been in a very curious position so equally to some of the retailers that you know, didn't really trade and have a difficult time. I think the real estate sector also has a very, very difficult hurdle to get across and it'll take us maybe many years to get past the damage that's been done currently. I'm just joining us at home. I'm speaking to a student who's the spokesperson for the property industry group is also chairman of the South African re association, as well as the CEO of growth point South Africa and we're talking about some of the opportunities and threats to the commercial property sector given the impact of COVID-19 on the sector. Now it's and I see that you know you've essentially excluded certain types of commercial properties from some of these, you know, relief. There are a few estimates whether it's, you know, discounting by 100% or 50% or whatever the case is some of them include your offices your logistics your warehouse and industrial healthcare hospitality. And can you just take us through you know some of the reasoning behind why those are excluded. I know that you, you know you've said that those should essentially approach their landlords and the landlords should deal with them on a case by case basis. I mean, or from even our peers at home would be interesting to just get a sense of why it is that they were actually almost taken aside a little bit to say, we know that you might also have challenges but you should actually have a more proactive conversation with your landlords individually. I think the main reason for that is really that it's very difficult to get a one size fits all for the whole economy right and and I think just to classify the properties I mean we're talking here, literally anything from hospitality right through to healthcare. There might be some residential in there there's also definitely you know other commercial forms like office and industrial now the reality is is every single tenant has its own dynamics in those sectors. And the reality is is that probably there in those sectors the relief is less required. But there will be certain people that say in the supply chain of retailers example. None of the retailers are paying the supply chain at this stage so we know that those those that component of the market is under, you know, severe pressure, and, and I know that the different property owners will definitely look favorably at assisting those tenants in this difficult time. The, the reality is is that that retailer was is quite unique and that obviously it's got specific dynamics and you're dealing with with a limited amount of different clients so it's quite manageable, and you can do kind of one size fits all so what we've done there is we've excluded the national retailers the food retailers the essential retailers, so we haven't offered them relief, clearly all the pharmacy the pharmacy groups have also been excluded so the essentials effectively are excluded because the reality is we don't have infinite ability to help everybody so we've had to make some really tough calls to say, look, those that can pay must pay, and those that are suffering the most we're going to try and help you the most so we've, we've split even the SMM is between highly impacted, and, and let's call it medium impacted and they get different levels of relief then we get medium size retailers, and then clearly the large retailers, and we've tiered the love if you'd like, and spread it across everybody but you know, obviously with more concern being really against the smaller guys, and less love being spread to the bigger guys, the reality is everybody wants to pay nothing so that is a is with you know the sort of position. Now I think that, you know realistically that that isn't a solution for anybody. And I think we've made a good progress with what we've done. There is understood much better understanding on both sides of each other's situation and I do think that in many respects, many retailers and landlords have found each other by the efforts of, of the property industry group, where we've put out these diet plan so it just makes discussions so much easier. And, and I think it's also helped many very desperate leaders so we've been inundated with unbelievable. messages, voice notes and males you know from clients, thanking thanking the property industry owners you know for what they have been prepared to do. And I think the reality is is that you know moving forward, we are concerned really as an industry. We've got businesses to run you can't infinitely help clients through through this difficult period. So, I think you know you've got like a three month window, after which I think even we as industry and we have undertaken to pay all our staff, pay all our suppliers and also continue paying our interest as well as the rates and taxes now, one of the biggest challenges for the industry over the past 10 years has been the unbelievable disproportionate increase in taxes over the past year. And if you're tenant, you've got this perception that landlords are making so much money, because look how my rent has grown. But when you analyze your bull actually very carefully, you would have would have noticed that the rent actually hasn't grown at all just about, and in fact that what we have seen has grown for a higher percentage than well notes and taxes over the past 10 years have grown with 559%. Now that's effectively annualized growth of 10 and a half percent per year. Now that is way in excess now I mean we are currently busy with with our own budgets, and I can tell you, the local municipalities have indicated that the rates are going up, double digit again. Now, the reality is what what's happening is that the percentage of operating cost is now disproportionate. And in fact, there are examples where tenants are now paying more in rates and taxes per square meter, and they are paying in certain shopping centers so we know that that's not sustainable we see a train smash coming and unfortunately local government has become too expensive for the people. And I remember that what has happened for the commercial property sector is we increasingly picking up the responsibility to provide services. So if you don't have, if you are a tenant in an office building or industrial property, and you don't get water consistently or if you don't get electricity consistently, you're going to ask the landlord for uninterrupted power or water tanks, increasingly we having to provide that at all our facilities. I mean in Cape Town when there was the water crisis, I mean growth point on its own spent 50 million ran in providing alternative water sources at various buildings now those that money has to come from somewhere and it's not really only return. And it's very difficult to recover so give you another example I mean provincial. Sorry, sorry to interrupt you there is a before you give us that example actually wanted to take a quick break. And our viewers at home will be back just shortly I am of course in conversation with the spokesperson for the property group, the property industry group, as well as the CEO of growth point and after the break is in actually want us to have a conversation around essay reads, I mean, I know some of those viewers at home might not be familiar with what reads are almost a high level, what are reads, and perhaps how they've been affected I mean we've been having certainly different conversations when we're talking property around the impact that reads, or the impact on reads. In the past couple of months and we've seen that some of them weren't already performing well prior to covert 19 so it's not as though the bad performance is necessarily because of the pandemic. So looking at why is it performing so badly, is that still, you know, a viable investment, your channel for people to actually look in, and I'm sure we'll even have a conversation around you tell another time because it's one of those topics that need to be quite extensively. But I think for purposes of today, we want to actually look at how they specifically been also affected by the covert 19 pandemic. To our viewers at home we're going to be back just after this of course we are talking about the impact of covert 19 on the commercial property sector. Welcome back to the private property podcast. I'm your host is a man doing well come out tonight I'm speaking to a steam declare who's the spokesperson for the property industry group as well as chairman of the essay read association and CEO of growth point South Africa. So let's talk about the impact of covert 19 on the commercial property sector and before the break, essentially talking about the different ways that this pandemic is essentially affected you know the different players, and some of the, the some of the ways that the different players have also tried to make it better for their respective tenants, and taking into consideration I think you know isn't one of the things that you actually mentioned that I wasn't aware of is is how, and you mentioned it just before we did a break that in certain spaces or some of the retail spaces that some of your members have, they essentially paying more for municipal for the municipality bill per square meter than they're paying for rental, which is actually quite shocking. I mean, especially when you consider that you can escalate rental by 18 or 20% I mean that that that isn't also a sustainable increase. Before we went to the break I also said I actually want us to talk a little bit about. And I think almost at a if you had to tell a great three students, what these are, and how would you best describe them and how they actually work. Let's start with a name clearly read sounds like something that should be growing in a river right, if you're speaking of the confusion. It's an acronym for real estate investment trusts now the reality is none of these companies are actually trusts, but it's like the Omo of Washington powder you know it's a name that is allocated to the real estate industry that has a certain tax dispensation. Now, what are these vehicles designed to do all these companies they effectively aggregate property investments, and they earn rental they have some expenses. Normally they have some debt, and then every six months they're designed to pay investors all the profit that they make so they are equivalent of actually investing into the direct property. If you buy a growth point share, then you will have a little piece of the Victorian Alfred waterfront will have a little piece of discoveries head office. So effectively it gives you exposure to the underlying real estate, and you're getting the net cash flow, and with the tax dispensation for reads that we negotiated with National Treasury, and which is an internationally recognized kind of tax dispensation for reads. You don't have you have much better tax efficiency so the entity itself gets a deduction and all the payments to its investors as tax free, and the investor actually picks up the tax bill so that it's a it's very efficient from from a tax point of view there's no double taxation. And then the other thing is is, you know, if we sell a property, there's no capital gains tax in the vehicle so it's, it's quite tax efficient from from a from that point of view and it's really designed to be very accessible to the man in the street as an investor so most of us, if we've got a bit of money and you think okay well I want property investment, then you think obviously of a house to maybe rent out, or maybe a holiday flat even. Now those obviously have got their place in your investment portfolio, but you know commercial property through Rita's very accessible you don't need huge quantities of money. You know if you had to go and buy the VNA you would have to pull out 20 billion Rand or something today so not all of us that in credit card. Somebody's got that kind of credit card I'd like them to wish right you have to do you know so you can get access to that property by buying let's say a share in growth point or you know there are various other rates on the market there's some that focus just on industrial properties there's some that focus on where small warehousing spaces self storage, there's various different niches, including retail, most of us, increasingly also have offshore exposure. So you know it really offers investors a very simple transparent way to invest. I think one of your questions was why have they been performing so badly over the past two years. Now the reality is is that if you go and contextualize how they perform relative to the rest of the economy. There's a very similar correlation. Believe it or not, actually the South African economy has been terrible for a couple of years right. When we look at our growth levels they haven't been where we potentially like them to be I mean in certain instances below 2%. I think there are certain instances where we're not even reaching the target that government has said so it hasn't been where we'd like it. I think we would be lucky if we're looking at growth anywhere close to double digits but obviously we're so far away from that, that we kind of have to re-adjust some of our expectations when it comes to certain returns. Sure I think that is obviously disappointing but if you're going to understand the real estate business what is it really? It's offering space to clients who rent it and it's also demand and supply kind of dynamic. So if there's too much office space and clients are shrinking like what we've seen at the moment so companies are not increasing their employment they're actually decreasing their employment. Clearly there's too much office space then what happens the price drops per square meter and the counters choose if the economy is growing. I mean we had a kind of a nice window from let's say 2004 through 2008 which we saw really strong growth in South Africa up to the World Cup and I mean at that stage you know the REITs were doing 15% growth and distribution year and year. So that was the sort of pinnacle. The reality is you are seeing quite a keen correlation with what's happening in the economy and these REITs can't let's say step out of line with what's happening in the fundamental dynamics of demand and supply. So there are certain sectors for instance industrial at the moment which still is reasonably resilient and doing quite still reasonably well but certainly retail and office they over the past few years they've really struggled as those sectors have come under under pressure. So the reality is do I think it's a good investment? I do think it is a good investment over the long term. Can't deny that at the moment you know South African economy is in a bit of a shambles and hopefully you know if we work together as a country and you know put our shoulder to the grindstone and work with each other to try and grow the economy then certainly you know the property industry will perform pretty well as well. We've got a question coming in. So if you've got any questions at home you're more than welcome to send them through and Istian will be able to respond. Istian this one is coming in from Bruno Santos who says he starts off with a comment saying commercial property moving towards shopping centers rent has been quite expensive for the company's leading shop space. I think that decrease space to try and mitigate the rental costs but yet new centers keep being built post COVID-19 won't this be more difficult for shops and restaurants to rent. Yeah. So I think, firstly, just to come back to a comment of that rent is so expensive I think the cost of occupation is has become expensive. And that comes to my earlier comment that we've seen rates and taxes electricity and utilities grows so exponentially. And it's really that that is putting quite a lot of pressure on on the tenants right over I can tell you an office and and even an industrial, the real growth in rental has been absolutely nominal over the past five years. And that's the same for retail. In fact, at the moment, both I would suggest are ticking class sort of negative on the rental line. But as I mentioned, you know rates and taxes double digit growth so that is one of the biggest things and as an industry we will be taking up that with the Minister of Corporate of governments in terms of the new shopping centers. Unfortunately, the only real catalyst to these new shopping centers are one Council providing the rights to those shopping centers to be developed so we've got very loose planning regimes in South Africa. And as a result, you've seen exponential growth of shopping center development. The second thing is is that the large retailers all commit to these new developments now I do think in the current environment that will slow down. And, you know, those have actually been more negative for the property owners, then they have actually been for the tenants because the dynamic is as if you continually opening up a new shopping center no next door. The trading in in the shopping center gets diluted in the existing one. So we have seen that competition coming on. And what you find is you might have had a good shopping center in an area that's well service. Now you've got two medium poorly performing shopping centers and, and both are struggling. So I do foresee that both in office, commercial and industrial, and even in all the other sectors that development will probably slow down in the current environment maybe for a couple of years, as as we kind of have to work through the the damage that's been done through this COVID period. And I was actually about to ask you that and I see Bruno actually added, you know, a certain component to his question where he says, I wouldn't be more difficult to build new shopping centers, sort of post COVID-19. And he essentially speaks to what you say I mean, are you, are you anticipating, given the economic climate that we find ourselves in and I suppose the various communities that we have in South Africa. Do you see instances where there might be a rise in certainly shopping centers in certain markets somewhere in the country, because we're already seeing especially in your townships and even rural areas that there's over, there's an oversupply in certain instances of shopping complexes to the point where, you know, they might perform well, perhaps for a few months but then they, you know, slowly start being empty. Where are you seeing that essentially going within the shopping centers in particular. Yeah, so I think just to understand the investment model so the investment model is obviously if you get the tenants they sign leases, you can build the building it has to offer a certain return to the investor, and then obviously a big component to this is also bank funding. And you need nearly all three of those components to work together. Now in the current environment, I don't think the rentals will justify the development of too many new developments in any of the sectors. And the risk for any investor is to the extent that they get the tenants to pay higher rentals to justify that development. Within five years, they're going to suffer big losses with rentals going backwards. So I think any astute investor will say look, you know, I'd rather pretty much sit on what I've got now. And in our country we don't have a positive spread between the cost of debt and and the yield or the return on the investment. So if you go and look at, let's say in Europe, you can buy a asset for 7% and you're funding it to 2% of interest. And in South Africa, the cost of debt is probably it's come down obviously in the short term rates but your long bond yields and your long funding is still probably around 99.5 ish. And the yields on these investments you're struggling to to build it and get a 9% yield. Yeah, double digit yield. So from that point of view, the new developments don't make sense. I think the value really lies in what I would call second hand or existing shopping centers or existing office buildings and existing industrial facilities. And I do believe that, you know, over time, those investments will perform reasonably well if you if you patient as an investor. And to the extent that you're investing into REITs, you know, it's quite transparent, getting professional management with that, you have a diversification in your investment. So if you go and buy one building or one, let's say residential unit, then you're quite exposed to that one, that one tenant, or the dynamics for that one specific investment whereas most of these companies have at least a level of diversification. One of them even have across sectors. Others have even across jurisdiction. So, yeah, so you're getting a very broad diversification and, and, you know, this covert sort of experience really shows the sort of risks in concentration. I mean, you know, for the past five years that we've been invested in the V&A, it's been the most amazing investment you can ever imagine. And we've been able to develop out that asset, but it is probably been the most hardest hit asset in South Africa under covert regulations, because it's closed down all the restaurants, the whole tourism industries closed down around it. And half of the shopping center, which is one of the biggest components of the Victorian Alfred waterfront has been predominantly shut down as well. So it is busy emerging now, but even the tourism sector, you know, so it helps to diversify your investments and by investing into these REITs, you know, a small investor can literally invest a couple of hundred grand a month and get a huge diversification across different components of the South African sector. I mean, I completely do agree with that one. I also invest in REITs. And I mean, I also have actual investment properties. And if you tend to find that with REITs, the amount is substantially lower. And if you're servicing multiple bonds, that's obviously higher than you're paying rates than you're paying ladies, whereas the REITs component of the investment is the lowest the returns are relatively decent. It's taking a long term view in many ways in my portfolio, you can afford to take that minor dip and we'll see how the recovery will be in the subsequent years. I said, I'm going to let you go. But before we do, you know, any last words, send me to our viewers at home about the state of the commercial property sector and where you potentially see it going, especially in the post COVID-19 world. Well, I look coming clearly in the months of April and May and it'll probably roll into June a little bit. I think it's going to be difficult for the sector across the board. But I do see it emerging and hopefully, you know, we'll emerge with the economy because clearly we depend on each other. I'm hoping that, you know, we'll be able to work through the short term pain and offer investors long term gain. So the reality is, is that, you know, the sector is very correlated to what's happening across the world at the moment. And whether you, in South Africa, Australia or Eastern Europe, we've certainly seen those experiences being actually very similar, because most of the governments have taken the same sort of stance on how to deal with this crisis. I think the situation in South Africa is bigger than just the COVID crisis. I think we've got certain structural economic challenges. And those will take, you know, some certainly tough medicine to get us to it. But I do believe as a sector, you know, South Africa's real estate sector has been one of its most competitive sectors globally, you know, and, and it's been one of the areas that's been growing strong and the nice thing about it creates jobs and it's fixed capital investment into, into our country. So it's certainly something that we believe should be supported. Thank you so much, Estian. That's Estian Dukak, who's the spokesperson for the property industry group, as well as chairman of the SA Reads Association, and the CEO of Growth Points in South Africa. We've been talking about the opportunities and threats in the commercial property sector, given the impact of the COVID-19 crisis. We are of course back again tomorrow evening right here on the private property podcast. Tomorrow is going to be an interesting one. It's going to be a Friday. And as promised, every second Friday, we're going to be profiling different people who are making strides in the property sector and talking to them about their property journey and how they did it. Absolutely do not want to miss that one. I love the woman that will be speaking to story. It's quite inspiring. She's very young. She's managed to build up quite a good property portfolio and will be telling us how she's done it and some of the tips and tricks that she's done on the way. Until tomorrow evening, hoping you're staying home and staying safe. And yeah, we'll see you again tomorrow evening. Good night.