Investors flee listed property, head for luxury rental homes

As the listed property sector takes a pounding due to the Covid-19 pandemic, the reaction of many affluent investors is to hurriedly move their funds into high-end bricks and mortar instead.

“And in Johannesburg, this is evident from a surge of interest recently in newly-built or off-plan apartments and duplexes in top-end lifestyle developments that are within easy reach of the Sandton CBD,” says Devon Brough, head of the Chas Everitt International new developments division.

“Indeed, we have sold more than R70m worth of units over the past few weeks in developments such as Aurora in Hurlingham, The Emerald in Hyde Park and Maya in Parktown North, at prices ranging from R2,6m to R4,5m.”

What lies behind this, he says, is the fact that the problems which Real Estate Investment Trusts (REITs) and other commercial property owners have been experiencing for some time have been thrown into sharp relief by SA’s strict lockdown rules. These have prevented most tenants in offices, retail and restaurant premises from being able to operate and led to huge rental losses.

“And the longer this situation lasts, the worse things are going to get. In retail, we are all aware that the fragile Edcon group has now gone into business rescue, but it is most definitely not the only company in trouble.

“Massmart, which owns Makro and Game, was carrying a R1,1bn loss even before lockdown; Woolworths is pushing landlords for lease/ rent concessions; Flight Centre is to close more than 90 retail outlets across the country and the SA Restaurant Association says many operators in the decimated industry will not even be able to re-open after lockdown.”

Meanwhile, Brough notes, the latest available SA Property Owners’ Association (SAPOA) statistics show that the national office vacancy rate was 11% at the end of last year - although it was as high as 20% in some areas – and that the national average rental increase for 2019 was only 2,5%, while inflation averaged 4% for the year.

SAPOA also said earlier this year that due to “economic headwinds and structural constraints such as electricity supply”, it did not expect the national office vacancy rate to return to mid-single digits within the next three years. “And now with so many additional people working from home and unlikely to go back to an office for the foreseeable future, the vacancy rate will no doubt increase.

“In any case, the SA REIT Association seems to be expecting the worst, and has made an urgent request to Treasury to relax the tax rule which says they must pay out at least 75% of their annual taxable income as dividends to investors. The REITs have asked for a two-year moratorium on paying out any dividends at all – and that move is what has really increased the momentum of the shift by affluent investors into bricks and mortar.”

What is more, he says, sales are on the rise even though prospective buyers are currently unable to physically view the units. “We have been using the new marketing techniques and platforms made possible by technology to great effect – and especially well-produced and very detailed video tours. In fact, several people have told us that they actually prefer to view property this way now, because it helps them to see things they might not have noticed as they can repeat the ‘viewing’ as many times as they like.

“In addition, developers have been adapting to wrap even more value into their offerings. In one instance, the developer is offering to pay buyers’ levies for a year, in another the developer is offering buyers free storage space worth R100 000 per unit and in a third, each unit now comes with a free staff-suite worth R300 000.”

As to investment returns, Brough says most purchasers are taking a longer-term view and expecting to make good returns as the demand for well-located luxury rental homes grows in Johannesburg as it has done in other major cities, while others are anticipating significant capital gains within a relatively short period due to the shortage of suitable land for more new developments.

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