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Has the office become a space to avoid?

‘Year by year we are starting to see more specialised sectors coming on, more industrial and warehousing-focused storage as well’: Reitway Global CIO Garreth Elston.

SIMON BROWN: I’m chatting now with Garreth Elston, chief investment officer at Reitway Global. Garreth, I appreciate the early morning time. Let’s chat about office space. We’ve seen in the US, with the Delta variant taking the storm, a lot of large companies saying they’re going to delay the return to the office. I think the most recent was Microsoft just the other day saying, ‘We don’t have a date in mind but at some point’. Longer term, even as they come back, the office [property sector] is going to be under pressure.

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GARRETH ELSTON: Yes. Good morning, Simon. It’s certainly a sector that’s been under pressure for about a decade, actually. If you look at the returns versus most of the other Reit (real estate investment trusts) sectors, it definitely has been lagging in the US, the UK, Europe – all the way down here as well. So definitely a sector that has been under sustained pressure. Covid certainly hasn’t helped.

SIMON BROWN: You make that point about the decade. Reitway Global had a great webcast last week and the talk around the office was that this isn’t a Covid phenomenon, it kind of predates that. Was it simply too much stock in the system, the likes of WeWork which said, “You know what, you don’t need an office, we can rent you space by the desk, by the day” sort of thing?

GARRETH ELSTON: It would be a part of it. If you look at IWG, which Regus is part of, they have a much, much larger portfolio than WeWork ever had. They’ve had a very limited impact over the years. But it has just been (about) slight changes in the nature of work, also in the nature of what tenants are really willing to pay and what they’re looking for.

So it has been a slow change, and it’s also been resistance to continually paying more and more for not getting space that really adds massive business value to a large amount of knowledge-based businesses, especially.

SIMON BROWN: I suppose that is the trend. If we go back a decade, what we have seen is an explosion of internet access, of devices that enable us to work remotely. Even if it wasn’t Apple saying people can work remotely, that trend has been growing. The pandemic has just accelerated it. Where does this sector go into the future? The one thing that struck me, chatting with one of the Americans in your webcast last week, was the talk around office conversions. He said something like, “We don’t do that in America at all”. What happens to these buildings?

GARRETH ELSTON: Well, it’s going to be quite interesting to see how it goes. I think it’s probably that you’ll find that we might be ahead locally here, versus some of the large markets which have been forced to have conversions. You’ll probably start to seen in time they’ll be forced to change if they have this much excess space, and you’ll start to see a change into potentially residential. Even locally here we have an office block that has been turned into a sports shop, for example, in suburbia. So who knows where it ends up? If there’s enough vacant space, landlords globally are not going to have much of a choice but to try and repurpose it or just bash it down and build something else in its stead. 

I think the long-term growth of the sector is going to be under pressure. Probably short-term, likely some bounces as people start to rotate back into the sectors, people return to work. But, long term, the pressure’s not going away.

SIMON BROWN: I take your point. We are going to get the folks coming back, although locally Nedbank has said three days a week, and Momentum has said they need 30% less space. That’s usually not the head office. I remember when I worked for Standard Bank in the city, they owned all of Simmonds Street, but then they had Commissioner and Alexandra and all those sorts of auxiliary buildings sort of out of the way. Is it then just a space to stay away [from]? The Reit, particularly globally, is a large sort of space. (There are) lots of other areas we can look at which are going to give us better returns. I’m thinking self-storage, I’m thinking towers and infrastructure.

GARRETH ELSTON: In general terms, bulk standard sort of vanilla office space is not going to be an exciting sector to be in for a while, but there are other subsectors within office [commercial property] that are interesting. For example, life science has been a fabulous sector over the last five years. Over the last year-and-a-bit with Covid it obviously has become even hotter. So there will be a change and a move into sub-sectors that become more interesting. But your standard sectors – it’s not going to be there.

SIMON BROWN: Okay. So office just remains a tough part, the point being in South Africa our Reit market is just so less developed. Broadly we’ve got sort of office retail and industrial/logistics. That puts the South African retail investor in a tighter squeeze when looking at the options on the JSE.

GARRETH ELSTON: Yes. But as we’ve moved on; year by year we are starting to see more specialised sectors coming on, more industrial and warehousing-focused storage as well. So it’s evolving, it’s getting there. And even with some of the large local ones you’ve started to see them try and move into some of the specialised sectors. For example, Growthpoint I don’t know if there’s a sector they’re not in at the moment, which again is: Do you want a conglomerate or specialist? It’s up to you.

SIMON BROWN: We’ve seen that in Fortress specifically. I think we are seeing our Reits becoming perhaps a little less generous.

Garreth Elston, CIO of Reitway Global, I appreciate the time this morning.

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