The SA property sector delivered a stellar performance in 2021 becoming the top-performing traditional asset class for the year, outperforming other equity sectors as well as bonds and cash. It should be noted that the strong performance in 2021 was preceded by a negative return and underperformance in the prior comparable period.

Source: Bloomberg, RMB Markets, Catalyst Fund Managers, 31 December 2021

During the year, severe civil unrest and riots disrupted the country’s economic rebound from the ravages of 2020, when the economy was hit by restrictive lockdowns in response to Covid-19.  The unrest resulted in physical damage and looting to many properties with shopping centres, warehouses, schools and ATMs being the most impacted. The affected areas were predominantly KwaZulu Natal and parts of Gauteng however its effects have had national ramifications with estimates of R50billion in output being lost due to the riots. Statistics SA reported that the July unrest contributed to GDP contracting by 1.5% in the third quarter. This contraction interrupted a four-quarter economic growth streak.

Based on the various financial reports released post the unrest, most of the impacted properties in the listed sector have returned to some level of operational capacity with the expectation that all assets will be fully operational in the 1st half of 2022. Most listed property companies and national tenants are insured through SASRIA for the damage and loss of income. We therefore did not see a material impact on the financial statements during the year as the lost rental income and the cost of restoration is being borne through insurance claims.

Finding the new normal

The pandemic has had economy wide implications and the property market is no exception. Property intersects with all areas of the economy and the pandemic has impacted each sector differently.

Below we highlight the current sectoral split for the 2 major property indices (SA Listed Property Index – SAPY and the All Property Index – ALPI). The traditional sectors namely office, industrial and retail still dominate with retail being the largest at 59-60% of the available listed property market.

Source: Company data, Catalyst Fund Managers

During the pandemic we witnessed the acceleration of key structural changes in the property sector. In the office environment, we saw the emergence or re-emergence of the WFH concept. Prior to the pandemic, globalization resulted in many of us conducting meetings/calls/webcasts over the internet with our counterparts either in different provinces and/or different countries. This was traditionally limited to a particular event/meeting; however, it paved the way for what was to come when lockdown restrictions were imposed. Many traditional office occupiers were then forced to experiment with a version of the WFH or hybrid concept.

Based on data from Statistics SA, the highest proportion of workers that worked from home corresponded to Q2 2020 which coincided with the harshest lockdown restrictions. This trend was on a downward trajectory but increased again to 7.8% as at Q3 2021. There is also a noticeable difference between the provinces with the Western Cape and Gauteng (representing the largest office markets in the country) having a greater proportion of their workforce working from home compared to the national average.

Source: StatsSA, Catalyst Fund Managers

Companies are still assessing the most optimal office system to adopt and fortunately no major new restrictions were imposed due to the emergence of the Omicron variant. Future lockdown restrictions and staff vaccination rates are likely to be key considerations in that decision making process. Highlighted below are some of the major corporations/institutions who have introduced mandatory vaccine mandates and those planning to introduce it in 2022. This provides an indication that corporates are planning for staff to return to their places of work in some capacity.

Source: Business for SA

In retail, e-commerce purchases and penetration accelerated while the logistics sector saw additional demand to cater for this surge as retailers optimized their supply chains. Traditional grocers expanded their online offering including Woolworths Dash, Checkers Sixty60 and PnP asap! with more stores/areas expected to be rolled out in the short term. The ability for traditional grocers to offer these services is reliant on their proximity to their consumers and the availability of the product in those locations. Intuitively, it makes commercial sense to use their existing store footprint not only due to location but also to cater to consumer preferences. A consumer can order dry goods (tea/coffee), refrigerated items (yogurt, cheese) and frozen items (ice-cream) with one order. For the retailer their existing stores can house all these products safely with dedicated packers fulfilling orders from the shelves.

Online retail as a proportion of total retail sales was estimated to reach 2.8% in 2020 (World Wide Worx) with strong growth still expected in the short term. The recent online results from the major SA retailers are highlighted below. Growth in online sales were strong across the board however online as a proportion of total sales remains relatively low. It should be noted that TFG and Truworths Group have significant offshore businesses where online sales are more substantial. Store rationalization is core to any retailer’s strategy, with underperforming stores closed or downsized while expanding or opening new locations in attractive nodes. Interestingly, despite the strong growth in online sales growth, store expansion was still evident in majority of retailers recent results. Going forward we expect SA retailers to continue investing in their e-commerce capabilities but also focus on their store footprint as it still represents the medium in which majority of their sales is generated.

Source: Company data, based on last reported, Catalyst Fund Managers
N/D = Not Disclosed

Retail vacancies on average have increased since the start of the pandemic as retailers rationalize their footprint and business failures creates additional pockets of space. The graph below highlights that while vacancies are higher than pre-pandemic there remains reasonable demand for quality retail space as represented by low vacancy rates in specific counters.

Source: Company data, based on last reported, Catalyst Fund Managers

“Uncertainty is the only certainty there is and knowing how to live with insecurity is the only security.”

– John Allen Paulos

As the world continues to grapple with the pandemic, we have seen varying responses with strict lockdowns imposed in some European countries and certain cities in China while SA has relaxed restrictions over the last few weeks. Early indications are that nationally we appear to have surpassed the peak of the 4th wave while other countries including the US are recording the highest number of cases since the pandemic began.

Structural changes in the property market are expected to continue which will impact the major traditional sectors. Companies are still in limbo as they await more clarity on which office model will work for their workforce and this is likely to hold back major office decisions. Mandatory vaccination policies indicate that companies are preparing for a return to their offices. E-commerce growth is expected to outpace traditional brick and mortar sales in the short to medium term however it remains off a low base. National retailers are continuing to invest in their e-commerce capabilities but remain focused on optimizing their store network which includes the expansion of under-represented stores or brands. In this regard, it’s important to have exposure to companies with a good quality portfolio, strong management team and a sustainable capital structure which will be able to adapt to the structural changes expected.