Rent Reductions, the effect of COVID-19 on South African Real Estate

The global impact of COVID-19 has been substantial. The real estate industry has especially been hard hit, with the long-term implications still to be felt. Many investors are starting to rethink the phrase, “as safe as houses” as we navigate these uncertain times.

No property sector has been immune to the effects of COVID-19, which are widespread across the country. Looking at data from recent months pertaining to rent reductions, paints a bleak picture of the trends we are seeing in the market, as well as what we see circulating in the news.

Data compiled from a representative set of MRI Property Central is illustrated and dissected below.

We have seen rent reductions increase from the start of the government enforced lockdown with the major affected areas being office and retail leases. Making up 60% of the total rent reductions across all rentable accommodation types. This represents in the region of R135M in reductions across 2300 tenants to the end of August 2020. In May we saw the most significant impact as we entered the second full month of lockdown.

Property funds and landlords have had to play an empathetic role during this time but to the detriment of their bottom line. At times this relief has not been enough. A drive down the road in your community reveals shop closures and ‘To Let’ signs popping up daily.

Industrial and warehousing leases have too been impacted, representing 25% of total rent reductions in our sample data, equating to R55M over a 6-month period.

Businesses globally have implemented “work from home” strategies which have come with their own set of challenges. For the most part, these businesses have been able to adapt to this ‘new normal’ of conducting business. It is no secret however that businesses are struggling to stay afloat, and this is directly impacting employee salaries and hence filtering into the residential property sector. Close to 3000 tenants in our sample data have received relief on their monthly rentals equating to nearly R16M (7% of total reductions). A drive to minimise portfolio vacancies puts the tenant in a position to negotiate lease rentals as we see the supply of residential rental units increase.

The already strained property market in all sectors and specifically evident in recent REIT performance, will be severely challenged to not only recover but to grow in the coming months and years. The impact will still be felt from the cultural change in “working from home”.  This will place huge pressure on office rentals and property development, not to mention how this will impact business culture going forward.

All said and done we are finding ourselves in an everchanging world. The speed of change seems to increase by the day. The importance of having your finger on the pulse of your portfolio and partnering with the right technology companies is paramount to success and differentiation during these times. Making use of sound software solutions will certainly add substantial value to the property industry for the foreseeable future as indeed it has done in the past to aid in recovery and growth.

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