Director: Corporate-911
South Africa has finally weighed in on the conflict in the Ukraine by saying that the conflict can only be resolved through diplomacy and mediation.
This is also the case with the Covid-19 Pandemic and addressing some of the tensions that have been caused by the crisis. We are all aware of the disruption that the Covid-19 Pandemic has caused. One of the biggest sectors that was impacted by the Pandemic was the commercial property space.
Factories had to scale down their production and those who were producing noncritical items had to deal with production facilities that basically came to a standstill. In the retail sector, companies were in deep negotiations with landlords regarding their rent because their argument was that they couldn’t pay it if they were not earning an income, the landlord’s stance was that the inventory was taking up space in their stores, so the rent was due.
Many lessons were learned during this period. How do we take these lessons and apply them as we try to move towards a recovery from the crisis? Deloitte recently released a report which discussed the impact that the Pandemic had on commercial property and how landlords dealt with these challenges.
The news is more positive than some may think.
The Covid-19 impact on property portfolios was not too severe
The report points out that the Covid-19 pandemic has disrupted businesses in most sectors across the country.
While many sectors were severely impacted, others benefited significantly such as online retailers. The real estate sector, on the other hand, has historically proven to be one of the most resilient and consistent sectors, even in turbulent times. However, it was not spared and has felt some of the impact of the Covid-19 pandemic and various lock down measures, as tenants struggled to survive.
The report adds that Most of the respondents indicated that the biggest impact on their property portfolio was due to the liquidity pressure faced by their tenants, particularly from sectors such as retail. This was followed by the devaluation of property portfolios which temporarily impacted covenants due to an increase in loan to value (“LTV”).
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Rental reliefs and deferments were the most common support provided to tenants
Despite being impacted by the pandemic, landlords have played a critical role in supporting tenants struggling with the effects of the Covid-19 pandemic and government lockdowns.
The Deloitte report points out that There was a need to strike a balance in supporting tenants due to different dynamics affecting tenants. Most of the respondents indicated that rental relief was the most common action provided by landlords to tenants, particularly during the first wave of the pandemic. Rental deferments were not as common as rental relief and where it was offered, it was largely tied to a payment plan.
As each business is different, offering tailored solutions after understanding the tenants’ business was also cited as some of the common actions provided by landlords. Landlords also indicated that it was very difficult to negotiate and reach some form of agreement with certain key customers. Other actions taken by landlords included looking at cost optimisation within their property portfolios and passing that on to their tenants.
Prudent cashflow management was the most common response to the Pandemic
The Deloitte report points out that landlords also took the necessary steps to respond to the impact of the Covid-19 pandemic on their businesses.
This was largely coordinated through the South African Property Owners Association (SAPOA), which took the lead in initial engagements with key stakeholders such as Lenders. Internal firm initiatives such as prudent cashflow management and suspension of current developments were the most common actions taken by landlords compared to external initiatives such as engaging with lenders for temporary covenant waivers/ relaxation.
The new normal
The report points out that there are potential fundamental shifts in the real estate sector which has been brought about by Covid-19.
The aftermath of the Covid-19 pandemic will be felt for years to come. Most companies are likely to establish a permanent hybrid working arrangement for their employees in terms of their return to work strategies. Other major changes brought about by the pandemic is the shift to online presence by major retailers.
In light of these recent developments, 63% of the respondents indicated there is a possibility that Covid-19 will accelerate a fundamental change in terms of where people work and shop, which may result in less demand of office and retail space. 37% of the respondents cited that it was unlikely due to a number of challenges such as lack of infrastructure. On the other hand, the increase in online shopping has presented an opportunity for investment and development in industrial properties as the demand for warehouses is likely to increase as online retailers bolster their online presence.
Dealing with this change can be disruptive. Corporate-911 can assist by doing a full audit of your business and recommending the right operating model to take your business to the next level.
Common actions indicated by respondents
- Adapt to new environment – learn to operate within the COVID-19 environment, with its constraints and limitations. Covid-19 impacts may include increased space requirements as people need to social distance, therefore space configuration will become important and buildings must become Covid-19 compliant.
- Preserving liquidity – Returning to basics in terms of preserving liquidity (i.e. suspend distributions and prudent cashflow management).
- Technological solutions to minimise business interruptions – Ensure that there is adequate technological solutions to be able to meet all the business needs. Hybrid working arrangements will require a proper booking system to ensure that the assets are operated efficiently.
- Focus on tenants’ safety – Ensure that tenants feel safe in the buildings and strict Covid-19 protocols are being observed. Therefore a core focus will be to improve occupational health and safety (i.e. air quality, sensors and other smart technology devices, which will in turn provide better access to data).
Common actions taken by REIT to position for a recovery
The report points out that real estate companies are repositioning for Covid-19 recovery, with a focus on refining strategy, and building better tenant relations, through improving communication and tenant experience, with the hope of increasing customer satisfaction even in uncertain times. The other focus is on sharing data with tenants to help them understand their utility usage to enable cost reduction. In this buyer’s/ tenant’s market, tenants are more selective, and so these repositioning movements will be more enticing and attractive to tenants.
Measures/actions to position REITs for a recovery include:
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Deepening relationships with tenants
- Increased engagement with tenants
- Focus on improving tenant experience
- Understanding customer changing business needs to offer the right solutions
- Flexibility in lease negotiation and structuring
Strategy refinement
- Re-assessing current sectors
- Re-evaluating the client base
- Diversification/Re-assessing SA portfolio
- Repositioning and repurposing assets
Strengthening balance sheet
- Debt reduction
- Continue with cost saving initiatives
- Sell assets
- Recapitalise the business
ESG commitment
- Re-affirm commitment to green initiatives/ESG
The future outlook of the real estate sector
The report points out that it goes without saying that the real estate sector played a key role in supporting tenants, providing much needed relief during one of the most unprecedented events in our lifetime.
As the vaccination programme gains momentum together with a slow economic recovery, further setbacks brought about by the July 2021 riots in Gauteng and KwaZulu-Natal (KZN), the real estate sector may take some time to fully recover.
One of the statements made in the report sums up the current marketplace perfectly, it is a buyers market, there is excess capacity and not enough demand, the race for space is over. This means that the sector is facing massive levels of disruptions. How do we, as BRPs and turnaround professionals, tailor our advice to address this disruption? It seems as if some of the more skilled professionals have already made inroads. Focusing on aspects such as strategy refinement, strengthening balance sheets and preserving liquidity are all classical coping mechanisms.
As a profession, we now have to look at how we offer advice to the real estate sector that positions the sector for growth beyond this recovery, it will not be a buyers’ market forever, the race for space will eventually resume.
Robin Nicholson is the Director of Corporate-911 and is a Senior Business Rescue Practitioner
