THERE is very little doubt that the outbreak of the Covid-19 virus is going to hit Cape Town property very hard – no matter the recent easing of lockdown restrictions.
The staunching of economic activity has already seen lease agreements adapted to help ailing tenants, and with a staggered opening of the economy a more Spartan regime seems likely to be the new normal for the local property sector for some months to come.
Most large property companies have withdrawn profit and dividend guidance as they battle to quantify the effects of the Covid-19 pandemic. Share prices of real estate counters have come under severe pressure on the JSE.
Some of the Cape’s biggest property companies have given an early glance into possible fallout in the short term.
Spear, which has an exclusively Western Cape-based property portfolio, would obviously provide the best proxy for gauging the effect of the pandemic on real estate activity.
Spear’s 436 436 square metres portfolio comprises of 454 tenants – of which, 60% (by gross lettable area) is occupied by large national, large listed companies and government. In excess of 56% of Spear’s gross lettable area (GLA) is industrial, with a large percentage being single tenanted.
Spear said its high quality and diverse tenant base was backed by strong balance sheet, sufficient liquidity and healthy cash flow. An interest cover ratio of 2.59 times meets all financial obligations, backed by a 97% occupancy rate at the lockdown stage of Covid-19.
Spear also reassured that the April rental collection exceeded 60% of revenue billed for the month.
Spear management also confirmed that the distribution growth forecast for the 2020 financial year was unchanged.
Of course, going forward there would naturally be worries around Spear’s leisure property exposure – comprising Double Tree by Hilton and 15 on Orange.
Spear disclosed that its hotel specific revenue represented only 7.5% of group revenue. But both hotels remain closed for the lockdown, which will impact rental revenue going forward.
Spear indicated that the Double Tree by Hilton was taking a proactive approach in dealing with the hotel challenges brought on by COVID-19.
So a contingent of staff remained actively marketing both accommodation and conference opportunities for the latter parts of 2020 as the globe emerges from a post COVID-19 lockdown.
The plush 15 on Orange premises is under lease agreement with hotel giant Marriott – which means Spear has no exposure to any hotel overheads.
But Spear confirmed rental is calculated on a revenue basis only. The group said Marriott planned a highly proactive reactivation.
In terms of the non-hotel portfolio, Spear stressed retail investments had only ever been made into the convenience retail sub-sector. Spear CEO Quintin Rossi said the convenience sector had proven to be very defensive in the current period.
Spear owns two convenience retail centres, both anchored by a Pick n Pay supermarket – which are classified as essential services and continue to trade daily.
Rossi said numerous other essential services continued to trade within the retail portfolio – most notably all South African banks and Clicks.
The retail portfolio constitutes 16% of revenue for the business.
Rossi said there would be, “without a doubt”, a period of rental relief provided by Spear for certain retail specific tenants based upon a triage approach.
“A revenue downturn across the entire retail real estate sector will be unavoidable in the current environment.”
He said the bulk of relief requests had been received by our retail tenants.
The Spear portfolio, fortunately, has no exposure to fashion retailers Edcon, TFG and Truworths.
Rossi said Spear’s industrial portfolio was highly defensive – comprising 30% of revenue for the business and with a high percentage of logistics centric, single blue chip tenanted properties.
He said a low percentage of relief requests had been received from industrial tenants.
Spear’s commercial office portfolio comprises 42% of revenue for the business. Rossi said the bulk of office tenants had activated a work from home strategy and are able to function (albeit at constrained capacity).
He said a low percentage of relief requests had been received from office tenants.
Rossi believed the Spear portfolio had a strong enough base to manage through the COVID-19 challenges.
In a more specific development stemming from Covid-19, Tower Property advised that the lockdown regulations had stalled the redevelopment of the retail space and 55 residential units at Old Cape Quarter in central Cape Town. Tower said work on this key revamp would recommence once permitted.
The cost to complete this project is projected to be just under R167 million, and the company has a committed funding facility in place.
Like many other property counters, Tower – which also has extensive property interests in Eastern Europe – has withdrawn its earnings and distribution guidance for the year ended May due to the uncertainty on the impact of Covid-19 on operations and financial position.
Meanwhile Trematon Capital Investments – a significant owner of Western Cape-based property – said its Aria property segment had not been immune to the effects of Covid-19.
CEO Arnold Shapiro said early tenant and stakeholder engagement allowed Aria to use Covid-19 as an opportunity to bring us closer to tenants through bilateral negotiations.
“Management has taken steps to ensure liquidity is preserved while the macro and pandemic forces unfold and become clearer and more determinable.”
Trematon’s residential real estate focussed Resi Investment Group had seen a relatively muted impact on its portfolio because most residents are in occupation.
But Shapiro expected arrears and vacancies to increase due to the constrained economic circumstances of tenants employed in affected industries. He said residential rental escalations were also likely to be muted. “Negative reversions are possible.”
Trematon’s sprawling leisure property Club Mykonos Langebaan was a mixed bag. Shapiro said the boat storage business and the yacht marina should be resilient – aside from the effects of generalised economic weakness.
But the conference centre and the rental company were closed for lockdown and would make small losses. Resort activity has also ceased, so commercial operations, such as restaurants, would be negatively affected.
Both Hyprop – which owns the Canal Walk shopping centre – and Growthpoint – which has a 50% stake in the V&A Waterfront – have issued Covid-19 related statements. But neither specifically mention the effects on the respective iconic Cape Town properties.
With a large ‘non-essential’ retail element (fashion retailers, jewellers and homewares etc), the Covid-19 lockdown and subsequent ‘restrictive stages’ are likely to have a profound effect on footfall and rental flows in the near term for both Canal Walk and the V&A Waterfront.
FPG take The Junction
CAPE TOWN based property group FPG, which has a focus on convenience store nodes, has paid R190 million for the Tokai Junction shopping centre.
The property was bought from Cape Town-based retail property investor Fairvest, which wants to focus on lower LSM properties like its precincts at Nyanga Junction and Nonkqubela Mall in Khayelitsha.
In truth, Fairvest has made a decent exit – having only paid R85 million for Tokai Junction in 2012.
The Tokai Junction deal is a key transaction for up-and-coming FPG, which already has over 180 000 metres square of gross lettable area. Tokai Junction appears a vibrant node in generating after tax profits of R14m in the year to end-June 2019. The property should add considerable bulk as well as rental stream diversity to FPG’s specifically niched retail property portfolio.
