Redefine Properties, South Africa’s second-largest real estate investment trust, believes the tough property market will ease if there is a strong election result for President Cyril Ramaphosa next month that boosts political certainty and business confidence.

“The 8th of May is a seminal point for us and post that point we believe things will start to improve from a confidence point of view,” Redefine CEO Andrew Konig said in an interview on Wednesday at the company’s Rosebank offices. “That will then start driving demand, which we are not seeing at the moment.”

Ramaphosa is expected to win his first electoral challenge since becoming head of the African National Congress in December but his bid been rocked by allegations of corruption against party members in televised hearings and the impact of state power utility Eskom’s rolling blackouts on business confidence. This while the International Monetary Fund [IMF] and debt rating agencies are concerned about what is forecast to be one of the worst years for economic growth in this region.

This week the IMF lowered South Africa’s projected gross domestic product growth rate for 2019 to 1.2% from 1.4%, above only Angola south of the Sahara. The Rand Merchant Bank and the University of Stellenbosch’s Bureau of Economic Research (RMB/BER) Business Confidence Index fell three points to 28 in the first quarter of this year, its lowest level since the second quarter of 2017.

Still, Konig says US business cycle weakness could benefit the South African property industry. “We were anticipating some upward pressure on the cycle and it seems that it is remaining flat for a more prolonged period, which will be good for property in general, will be good for bond markets – and that obviously turns into capitalisation rates from a valuation point of view.”

Fewer transactions

Investment activity in the property sector recovered with deals valued at R19 billion in 2018 compared with R11.6 billion in the previous year, according to consultants Jones Lang LaSalle (JLL). “The improvement in investment activity in 2018 goes to show that there are deals in the market,” JLL analyst Omphile Ramokhoase wrote in an emailed reply to questions.

“However the tough market conditions, coupled with more conservative requirements from banks and financiers, have resulted in fewer transactions taking place.”

In the office rental market, Redefine says it will focus on retaining tenants as it copes with an over-supply of offices in the Sandton business district of Johannesburg and high demand for prime grade office space in the Rosebank neighbourhood five kilometres south.

Another strategy is grasping the rising trend of flexible workspace by landing the larger co-working businesses that sublet space and office amenities to small and large companies, often with on-the-road staff. These include Flexible Workspace, The Business Exchange, Regus and WeWork, according to Redefine asset manager Pieter Strydom. WeWork is the primary tenant in Redefine’s new 15-storey Rosebank Link. 

Tradesmen preparing the WeWork rental space at the R712m Rosebank Link building. Picture: Author

Citing a study of 15 000 employees across 80 nations by the Switzerland-based International Workplace Group, Strydom said 79% of those surveyed in South Africa see flexible working as the new normal and 62% of local companies surveyed said they have a flexible work policy. Three-quarters of the companies said they do it to reduce commuting times, the study shows.

Long leases

Konig acknowledged the trend but said it wouldn’t dominate Redefine’s pursuit of clients such as the law firms signing a minimum of 10-year leases at its prime-grade building at 2 Pybus Road in Sandton.

“That’s our preference, to have a long-term tenant in situ rather than having a flexible arrangement because at the end of the day from a valuation point of view, the longer the lease covenant, the better the valuation that you derive from that property,” the CEO says.

It’s the same kind of certainty Konig wants to see from the election so President Ramaphosa can subdue the loyalists of his predecessor Jacob Zuma who might stand in the way of trimming the cabinet and dealing decisively with the corrupt activities alleged to have occurred.

“Certainly we do believe if he does get a strong mandate he can deal with what is required,” Konig said. “It’s not that the Zuma faction is going to disappear, by no means, but certainty will give him that mandate.”