Top landlords ditching Gauteng for Western Cape where ‘returns are better’

South Africa’s biggest property owners are increasingly reducing their exposure to Gauteng and shifting their focus to the Western Cape. This mirrors the entrenched trend to ‘semigration’ where those with the means have been steadily relocating to Cape Town or the Garden Route from other parts of the country.

Following the riots and floods in KwaZulu-Natal in recent years, sentiment in that region’s residential property market has plummeted with 14% of sales due to relocation within the country (mostly to the Cape) – nearly double the pre-Covid rate.

ALSO READ: Good chance Pretoria Deeds Office will reopen as planned

One of the largest landlords in the country, Growthpoint, said last year already that the optimisation of its portfolio is “designed to lighten our exposure to cities and provinces with less supportive business and property dynamics by reducing our Gauteng portfolio and investing more in the Western Cape and in 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 brink of collapse.

Specifically, Growthpoint says its strategy is to expand its “Western Cape office portfolio in growth nodes”.

Currently about a quarter of its office portfolio is in that province. In last month’s results presentation for the first half of FY23, the group says it will “reduce office exposure in non-performing nodes in Gauteng and increase exposure in the Western Cape”.

Generally, vacancies in coastal regions are lower than in Gauteng (this is not only true of the office sector, but also industrial assets). For Growthpoint, its office vacancies are 11.9% in the Western Cape, 5% in KZN (it only has offices in Umhlanga) and 27% in Sandton.

Redefine, which only has 16% of its total portfolio in the Western Cape, says it will prioritise the refurbishment of its Grade P and Grade A assets. Its “Cape Town portfolio will be the immediate focus”.

Jones Lang LaSalle’s recent South African Real Estate Investment Review and Outlook for 2022/23 says the Western Cape saw a 66% increase in direct investment in 2022 – taking its share of total investment in the country to nearly a quarter (23%) from 11% in 2021. Gauteng’s share fell from 68% to 52%.

Not just about the beauty …

FNB Commercial Property Finance strategist John Loos says that in the current “weak economic and property rental market environment, rates and tariffs really start to matter far more to both landlords and tenants, and it is really not just about the level of rates and tariffs, but also about what quality of municipal and utilities’ service is received in return”.

“Such shifts in business activity geographically will escalate in the near future, given that many companies are increasingly financially constrained in a stagnant economy, and with many councils implementing above inflation rates and tariff increases while services and infrastructure deteriorate”.

Loos notes that some listed property funds are “pointing to a region that appears to stand out above the rest in this regard”.

“These property landlords appear to be significantly more excited about the deal they receive in the Western Cape, a region that appears to be increasingly outperforming the rest in terms of service delivery, infrastructure, household and business investment retention and attraction, and economic and property market performance.”

Semigrants

“[The Western Cape] region has for years been attracting strong net inflows of skilled and higher income ‘semigrants’ as well as some business ‘semigration’ too,” adds Loos.

Even residential property developer Balwin echoes this shift in the market, saying last month that “regional trends continue to favour the coastal regions, especially the Western Cape, where demand remains resilient”.

It is not just service delivery and the functioning of municipalities that are factors (although ask Liberty Two Degrees, which has had to dispute its rates bills in recent years for its two largest assets!).

READ: IMF forecasts for some countries a tad too optimistic?

Increasingly, the ability of the City of Cape Town to offset load shedding somewhat, together with a plausible plan to procure additional power, is a major consideration.

Spear Reit CEO Quintin Rossi told Moneyweb earlier this year about one thing that’s “very attractive” about the Western Cape when it comes to the City of Cape Town grid “there is a general undertaking from the city”.

“We enter into curtailment agreements on our large industrial assets, and then all our tenants on those complexes agree to reduce their load, which then means that they do not get load shedding, which creates business continuity,” Rossi said.

“I think now more than ever, properties that are located within the City of Cape Town supply actually have the competitive advantage of being able to keep the lights on for longer, which means when people are looking for real estate solutions – and I’m talking provincially now – they would be inclined to look at the City of Cape Town … If you weigh up the loss of productivity, the additional labour cost, plus the cost of your diesel when you’re on an Eskom supply versus a City of Cape Town supply, even though the City of Cape Town’s kilowatt/hour charge is slightly higher, the business continuity is there.”

Spear Reit itself spotted this trend well before other funds on the JSE. It listed in 2016 with the aim of investing in real estate across the three major sectors, while maintaining “a strict Western Cape focus with a Cape Town bias”.

It said this was “due to the favourable economic and property fundamentals in the Western Cape and management’s belief that proximity to assets allows its management team to extract maximum value out of its properties from an asset management, property management, and general oversight perspective”.

Semigration is good for business. It said in its pre-close update in February that its investment universe is expanding with “numerous new growth nodes being established within the Western Cape as semigration drives development growth”.

This article originally appeared on Moneyweb and was republished with permission.
Read the original article here.

NOW READ: We will fight Eskom up to the Constitutional Court – IPPs