SA commercial real estate delivers in excess of 12% yield on equity
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A silver lining amongst the many dark clouds dominating South Africa’s current economy is, thanks to recent interest rate cuts, commercial real estate - especially purpose-built quality logistics assets supporting the ongoing e-commerce boom in the country. With the prime interest rate at 7%, “buyers are easily negotiating mortgages on good income-producing commercial properties at 5.5%,” observes Steven Brown, CEO at Fortress REIT Ltd.
At these rates if buyers purchase a R10 million commercial property earning 9% via a R5 million equity investment and R5 million mortgage at 5.5%, annual interest costs will be R275 000 off annual earnings of R900 000. “A net income of R625 000 off an equity investment of R5 million represents a yield of 12.5%. Hard to beat in the current market,” says Brown.
The obvious signals that these numbers send is that it’s a great market in which to buy commercial property, especially properties relevant to e–commerce. It is also, “a great market to invest in funds and trusts that are buying and developing quality commercial properties,” says Brown. Most significantly from an investment perspective, however, is that these numbers, “signal that now is the time for many of the smaller real estate investors who left the market 12 to 18 months ago to return,” suggests Brown. In an economy showing lackluster alternate investment propositions, “commercial real estate is once again offering significant upside,” he adds.
One obvious potential risk in this scenario is a sudden and significant increase in interest rates. Reserve Bank policy as well as an examination of its practice over many years, however, suggests that, “significant interest rate hikes are unlikely – at least in the medium term,” says Brown. With a stable of over 100 smaller industrial and office assets in South Africa - collectively valued at around R 5 billion - Fortress is an investor, developer, leaser and trader in well-located, quality commercial real estate across the country.
Fortress, which also owns a 23% - R10 billion - stake in Eastern European-focused property company Nepi Rockcastle, has learned that while omnichannel will diversify shopping and purchasing options, South Africa is not going to see the death of retail malls or other quality commercial real estate assets. “Omnichannel works best when digital and physical combine in a seamless service and experience,” says Brown. Malls are here to stay - though with retail likely to become more concentrated into the last mile of big, dense, urban nodes. Assets in outlying and rural areas with less competition and lower e-commerce penetration will also retain their relevance from a bricks-and-mortar retail perspective.
While a weakened economy might see some consolidation of retail real estate assets, the best quality and most strategically located properties will, “retain their role as drivers of town hub formation, especially for the delivery of critical goods and services in rural South Africa,” predicts Brown.
With this is mind, and as a defensive play, Fortress will retain and enhance its current R10 billion convenience retail real estate portfolio focused on commuter hubs and key rural nodes, even though as Fortress’ logistics commitments increase, retail will, “eventually account for a third of our overall portfolio,” says Brown.
As one of South African’s largest real estate investment trusts Fortress has the risk capital to optimise the right land with the right infrastructure, “developing, leasing and selling innovative and sought after commercial real estate assets at the cutting edge of ecommerce and supply chain competitiveness,” concludes Brown.