Rental declines of over 20% are more common than one thinks
By Moneyweb 29 Mar 2022
The country’s largest landlords are being forced to take stiffer and stiffer haircuts on rentals as they confirm leases with existing as well as new tenants.
In some instances, property funds are reporting rent reversions (averages or derived) of well over 20%. This means some leases are being concluded with tenants at rentals that are, on average, about a quarter lower than the lease that had just ended. For example, a lease would be signed (whether as a renewal or with a new tenant) at R148m2 over space where a lease had just ended at R200m2.
Average rental growth turned negative between 2017 and 2019, in other words prior to the Covid-19 pandemic. At this point escalation rates that had been enjoyed by landlords for more than a decade simply became unsustainable. By the end of a lease, the escalations meant that rentals being paid were higher than alternative available space. This trend was sharply exacerbated by the pandemic and saw landlords switch their reporting to “reversions” instead of “rental growth”.
An analysis by Moneyweb of the most recent updates (results or pre-close statements) from the largest landlord real estate investment trusts (Reits) in the country shows that reversions in retail properties are largely better than those in the office sector – but that both are firmly negative.
Given their scale and diversification across regions and types of properties, Growthpoint and Redefine are fairly good representations of the health of the overall sector.
In the second six months of 2021, Growthpoint saw rent reversions of -15.4% across its 1.3 million square metre retail portfolio. This was not far off the figure for the year to the end of June (-15.6%). In a pre-close update last month, Redefine says its “rent reversion on [retail] renewals to January was -4.6% on 90 128m2”. This space comprises around 7% to 8% of its total retail portfolio.
The real pain is being felt in offices, because of a combination of oversupply in certain nodes (particularly Sandton) and a sharp reduction in demand due to the adoption of flexible working arrangements spurred on by Covid-19.
Rent reversions in the sector are largely hovering above 18%. On that hypothetical rental of R200m2, a rental reversion of 18.9% (as reported by Growthpoint) would mean a new lease at R162m2.
Period Retail rent reversion Office rent reversion
Growthpoint Six months to Dec 31 -15.4% -18.9%
Redefine Sep to Jan -4.6% -18.6%
Hyprop Six months to Dec 31 -13% -18.2%
Investec Property Fund Year ended March 31 -11% (expected for entire portfolio)
SA Corporate Year ended Dec 31 -8% -20.5%
Attacq Six months to Dec 31 -8.1% -10.1%
Emira Six months to Dec 31 -18.3% -17.4%
Liberty Two Degrees Year ended Dec 31 -26% -24.8%
It must be reiterated that these are averages for each fund’s portfolio of assets.
This means that some leases could be signed at, say, 5% less than the rental of the lease that had run its term (or been terminated) while others may be signed at, for example, 25% less.
There are multiple variables here, including demand in the node where the property is located and the type of space (a small line shop is a different proposition entirely to space vacated by Stuttafords or Edgars or movie cinemas).
Certain leases where it would be trickier to find tenants may all end at the same time, which would likely mean cuts to rentals would need to be more aggressive for the property owner to do a deal.
Certain of the funds included above have portfolios that are more heavily exposed to certain nodes and weighted more heavily to either retail or office.
For instance, Hyprop’s office exposure is concentrated in Rosebank and Hyde Park Corner (adjacent/part of its mall properties in these areas).
Attacq is almost entirely exposed to the Waterfall precinct with its office portfolio.
Similarly, Liberty Two Degrees’s offices are part of Sandton City, Nelson Mandela Square, Eastgate and Melrose Arch. Its retail rent reversions are higher than its peers, suggesting it has had to take far lower rentals on the 7.4% of its mall portfolio that came up for renewal in 2021.
Also at play is whether the new lease is being concluded with an existing tenant (a renewal) or a new one. Typically, landlords prefer to retain tenants – especially quality ones.
In Hyprop’s local retail portfolio, which includes Canal Walk, Clearwater, Hyde Park Corner, Rosebank Mall and Somerset Mall, it reported rental reversions of -5% for new tenants in the six months to end-December. For renewals, this figure was -15.9% (the average across the retail portfolio was -13%, suggesting many more renewals than new tenants).
Emira also offers a split: renewals had average reversions of -18%, while for new tenants the figure was -13.9%. In this instance, the renewal of the lease for Makro at Crown Mines (19 000m2) was done at a rent reversion in excess of 20%. Emira reports a reversion for the fund of -17.7% at December 31 – while excluding the impact of this lease, the reversion is ‘only’ -12.4%.
Blue chip tenants know they have the upper hand in the current market.
Not only are they ensuring that their renewals are being done at materially lower rentals than they had been paying, they are also negotiating escalations that are lower than the overall market. In Hyprop’s retail portfolio, renewals will escalate at 6.2% on average, compared to 6.4% for new tenants. And they’re squeezing landlords on lease durations.
It will be some time yet before these reversions return to growth, particularly in the office sector.
And yet you have REITs like L2D trying to tell us that things are much better than pre-covid 19 times. Give me a break. Maybe the JSE should investigate their management for lying.
South Africa has one of the largest unemployment in the world yet we have so many malls. It does not make sense. Eastern Europe, which has much stronger economic growth has far fewer malls than us.