2020… what a drag! You can say that again… 2020, what a drag!
People were forced to stay home, businesses were shut down, people lost their jobs and people passed away (condolences to those reeling from people they lost)… all thanks to a virus that has swept the world. It has been a mess, and continues to be a mess frankly [I feel this is thanks to teenagers going to the coast for Matric Rage and secretly making a variant that is MORE contagious than ever. Honestly it feels like Corona had a couple of Coronas while festering in a young person’s body only to evolve into a stronger & more deadly beast… it feels like a Batman movie where the villain gets knocked down but comes back twice as stronger. Note: I used Batman for a particular reason(hmmm)].
So, yes, it’s been a mess and continues to be a mess even into 2021. Regardless of this, we carry on, and will do so until such time as there is a vaccine on our shores – who knows when this will happen though [For those with deep pockets however I have heard that Christo Wiese took a flight to Dubai, stayed there for a week and got the vaccine… lucky bugger].
Where does this all leave the real estate sector?
It leaves it in a very very precarious position… precarious as! Why? There is a barrage of headwinds against the sector, lets run through some (note there are many more):
- To start off… even before COVID-19 the sector was creeping into higher Loan to Value (LTV) territories… this means that the debt on company balance sheets was getting into uncomfortable spaces, why uncomfortable?
- Because of property valuations… valuations have come under fire over the last 3 years, why is this?
- Property fundamentals even before COVID-19 were under attack… vacancies were in uncomfortable spaces & were increasing YoY, the market was/is oversaturated wrt space being available that was/is essentially the same… and lastly thanks to Resilient & its friends, any governance issues in the industry were highlighted and share prices (industry-wide) took a knock. [these were but a few of the themes pre-COVID – one could in fact argue that the sector was screwed from the start thanks to the Short-Term nature of the game. Property is a long-term play, have you never played Monoply?]
- Companies have been quite aggressive in their valuations approaches over the years. The yield’s that some REITs used to value property were/are out of kilter for what was actually going on in the market…
Side bar: Honestly, it feels like bank’s loan books are in serious trouble… this could impact their valuations in the market further… I predict this for the future:
- Tenants’ inability to pay rent ~ no doubt driven by less disposable income in the economy & COVID-19 restrictions ~ less time to trade given the laws (key word: restaurants). And the knock-on effects …. The whole business model is premised on the tenant’s promise to pay rent. Will this new pattern impact the future of valuations and funding?
- As discussed in our last article, trends re office space… tenants are actually feeling out whether they need all their 1,000 m2 to operate… and probably realising that they need half… add this to increasing vacancies and that seriously worrying. How do you reprioritise all that space? Nespresso machines anyone???;
- Online retail is booming… thanks to COVID-19. It’s easier and you are not putting yourself in harm’s way… Real question is: is it really necessary to go to the mall to get the stuff you want? It’s a rhetorically question… I predict that a handful of malls will survive (long-term trend 6 years +). Simply put, there can’t be so many malls so close to one another offering the same stuff, especially when people are migrating to online more.
Note, there are lots of other trends re Covid and real estate, these are games we can play at home. The fact is the industry is like BAD place… but like the Phoenix rising from the ashes, its time… time to adapt, learn how to fly and shine bright like the diamond that they believe they are (I’m talking about the real estate companies out there).
Yes, they are driven by short-term incentives, and that is unfortunate, but if there ever was wiggle room to transform its now.
Asking questions such as (amongst others):
- Are we relevant in this industry?
- Have we adapted to this wave of technological change?
- Are we really attracting the maximum shoppers we can pull from our primary catchment area?
- Can this office space be converted to residential units should the need come about?
Those questions are relevant yes, and there are many many more. But the point I want to make is the following:
Economies, industries, sectors and businesses are cyclical in nature. There are good times, there are bad times… this is clearly a bad time to be doing business (in any industry or sector ~ except for online retail) in the real estate sector. Yes, there are pockets of excellence like logistics property owners and even residential property sales, which is on the up in the lower to middle income sectors of the industry thanks to lending rates being low, low as.
But, back to my point: Cycles tell us that in bad times it would be indeed prudent or a good thing to invest in yourself so that when the cycle upswings again you are smiling from ear to ear as you are sitting pretty. Easier said than done in a sector where short-term gains dictate what business models do… sad but true.
But for those that have cash reserves, now more than ever I would recommend investing it in yourselves, rather than for example acquire a new property OR pay more divis (the sectors already bleeding, I say bleed a little more). It’s time to back yourselves and become more relevant… how? Technology! PropTech…. It can do this for you.
Be smarter about how you operate, become more relevant… its times for you to be summoned by Dumbledore himself and for you to assist Harry Potter in defeating the Basilisk! Look into the metaphor as you like, my point is if there was a time to transform… it is now! Carpe diem!
Shine bright like a diamond!